Medium Term Notes Linked to a Basket of Three International Equity Indices Due August 2, 2010

The NYSE Alternext U.S. LLC

Securities registered pursuant to Section 12(g) of the Act: none

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities
Act.xYesoNo

Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.oYesxNo

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.xYesoNo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x

Indicate
by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

xLarge accelerated filer

oAccelerated filer

oNon-accelerated filer(Do not check if a smaller reporting company)

oSmaller reporting company

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).oYesxNo

The aggregate market value of JPMorgan Chase & Co. common stock held by non-affiliates of
JPMorgan Chase & Co. on June 30, 2008 was approximately $117,255,349,362.

Overview
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) is a financial
holding company incorporated under Delaware law in 1968. JPMorgan
Chase is one of the largest banking institutions in the United States of
America (“U.S.”), with $2.2 trillion in assets, $166.9 billion in stockholders’ equity and operations in more than 60 countries.

The Firm’s website is www.jpmorganchase.com. JPMorgan Chase
makes available free of charge, through its website, annual reports
on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K, and any amendments to those reports filed or furnished
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934, as soon as reasonably practicable after it electronically
files such material with, or furnishes such material to, the Securities
and Exchange Commission (the “SEC”). The Firm has adopted, and
posted on its website, a Code of Ethics for its Chairman and Chief
Executive Officer, Chief Financial Officer, Chief Accounting Officer and
other senior financial officers.

A description of the Firm’s business segments and the products and
services they provide to their respective client bases is provided in
the “Business segment results” section of Management’s discussion
and analysis of financial condition and results of operations
(“MD&A”), beginning on page 40 and in Note 37 on page 214.

Competition
JPMorgan Chase and its subsidiaries and affiliates operate in a highly competitive environment.
Competitors include other banks, brokerage firms, investment banking companies, merchant banks, hedge funds, insurance
companies, mutual fund companies, credit card companies, mortgage
banking companies, trust companies, securities processing companies, automobile
financing companies, leasing companies,
e-commerce and other Internet-based companies, and a variety of
other financial services and advisory companies. JPMorgan Chase’s
businesses generally compete on the basis of the quality and range
of their products and services, transaction execution, innovation and
price. Competition also varies based on the types of clients, customers, industries and geographies served. With respect to some of its geographies and products, JPMorgan Chase competes globally;
with respect to others, the Firm competes on a regional basis. The Firm’s ability to compete also
depends upon its ability to attract and retain its professional and other personnel, and on its
reputation.

The financial services industry has experienced
consolidation and convergence in recent years, as
financial institutions involved in a broad range of
financial products and services have merged and, in
some cases, failed. This convergence trend is
expected to continue. Consolidation could result in
competitors of JPMorgan Chase gaining greater
capital and other resources, such as a broader
range of products and services and geographic
diversity. It is likely that competition will
become even more intense as the Firm’s businesses
continue to compete with other financial
institutions that are or may become larger or
better capitalized, or that may have a stronger
local presence in certain geographies.

Supervision and regulation
The Firm is subject to regulation under state and
federal laws in the U.S., as well as the
applicable laws of each of the various
jurisdictions outside the U.S. in which the Firm
does business.

Recent legislation affecting the Firm: In response
to recent market and economic conditions, the
United States government, particularly the U.S.
Department of the Treasury (the “U.S.
Treasury”), the Board of Governors of the Federal
Reserve System (the “Federal Reserve”) and the
Federal Deposit Insurance Corporation (the “FDIC”), have
taken a variety of extraordinary measures designed
to provide fiscal stimulus, restore confidence in
the financial markets and to strengthen financial
institutions, including capital injections,
guarantees of bank liabilities and the acquisition
of illiquid assets from banks. In particular on
October 3, 2008 and February 17, 2009, the Emergency
Economic Stabilization Act of 2008 (the “EESA”) and
the American Recovery and Reinvestment Act of 2009
(the “ARRA”), respectively, were signed into law.

The EESA
and the ARRA, together with the U.S. Treasury’s Capital
Purchase Program (which provides for direct purchases by the U.S.
Treasury of equity of financial institutions)
contain provisions limiting the Firm’s ability to
pay dividends, purchase its own common stock, and
compensate selected officers and employees, among
other restrictions. For further information
regarding certain of the recent limitations
applicable to the Firm, see Regulatory Capital on
pages 71–73.

Other programs and actions taken include (1) the
U.S. Treasury’s Temporary Guarantee Program for
Money Market Funds, which is designed to guarantee
the share price of eligible money market funds that
apply to the program and pay a fee to
participate, (2) the Federal Reserve Bank of New
York’s Money Market Investor Funding Facility (the
“MMIFF”), which is designed to provide liquidity to
U.S. money market investors, (3) the Federal
Reserve’s Commercial Paper Funding Facility, which
is designed to provide liquidity to term funding
markets by providing a liquidity backstop to U.S.
issuers of commercial paper, (4) the Federal
Reserve’s Asset Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility (the “AML Facility”),
which is designed to provide liquidity to money
market mutual funds under certain conditions by
providing funding to U.S. depository institutions
and bank holding companies secured by high-quality
asset-backed commercial paper they purchased from
those money market mutual funds, (5) the FDIC’s
Temporary Liquidity Guarantee Program (the “TLG
Program”), which enables the FDIC to temporarily
provide a 100% guarantee of the senior debt of all
FDIC-insured institutions and their holding
companies, as well as deposits in
noninterest-bearing transaction deposit
accounts, (6) the Federal Reserve’s

Primary Dealer Credit Facility (the
“PDCF”), which is designed to foster the financial
markets generally, was modified to expand the
eligible collateral to include any collateral
eligible for tri-party repurchase agreements, (7)
the Federal Reserve’s Term Securities Lending
Facility (the “TSLF”), which is designed to promote
liquidity in the financial markets for treasuries
and other collateral, was expanded to (a) include
all investment-grade debt securities as eligible
collateral for schedule 2 auctions and (b) increase
the frequency of schedule 2 auctions, (8) the
Federal Reserve’s adoption of an interim rule that
provides an exemption, until January 30, 2009, to
the Federal Reserve Act to allow insured depository
institutions to provide liquidity to their
affiliates for assets typically funded in the
tri-party repurchase agreement market, (9) the
Federal Reserve’s Term Auction Facility (the
“TAF”), which is designed to allow financial
institutions to borrow funds at a rate that is
below the discount rate, (10) the Federal Reserve’s
Term Asset-Backed Securities Loan Facility (the
“TALF”), which is designed to assist in the credit
markets in accommodating the credit needs of
consumers and small businesses by facilitating the
issuance of asset-backed securities and improving
the conditions for asset-backed securities more
generally, (11) the Federal Reserve’s announcement
that it will purchase up to $600 billion of direct
obligations of housing-related
government–sponsored enterprises (“GSEs”) and
mortgage-backed securities of GSEs, (12) the U.S.
Treasury’s Financial Stability Plan, which involves
(a) the creation of a public-private investment
fund of up to $1 trillion, (b) the expansion of the
TALF program up to $1 trillion under the consumer
and business lending initiative, and (c) the
creation of a financial stability trust for bank
investment and additional transparency, and (13)
President Obama’s Home Owner Affordability and
Stability Plan, which is intended to (a) provide
refinancing assistance for responsible homeowners
suffering from falling home prices, (b) a
comprehensive $75 billion homeowner stability
initiative, and (c) strengthen confidence in the
GSEs. The Firm is currently participating in certain of these
programs and may become a future participant in others of these
programs, or additional new programs established by the
U.S. government.

Permissible business activities: JPMorgan Chase
elected to become a financial holding company as of
March 13, 2000, pursuant to the provisions of the
Gramm-Leach-Bliley Act (“GLBA”). Under regulations
implemented by the Board of Governors of the
Federal
Reserve System (the “Federal Reserve Board”), if any
depository institution controlled by a financial
holding company ceases to meet certain capital or
management standards, the Federal Reserve Board may
impose corrective capital and/or managerial
requirements on the financial holding company and
place limitations on its ability to conduct the
broader financial activities permissible for
financial holding companies. In addition, the
Federal Reserve Board may require divestiture of
the holding company’s depository institutions if
the deficiencies

persist. The regulations also provide that if
any depository institution controlled by a
financial holding company fails to maintain a
satisfactory rating under the Community
Reinvestment Act (“CRA”), the Federal Reserve Board
must prohibit the financial holding company and its
subsidiaries from engaging in any additional
activities other than those permissible for bank
holding companies that are not financial holding
companies. At December 31, 2008, the
depository-institution subsidiaries of JPMorgan
Chase met the capital, management and CRA
requirements necessary to permit the Firm to
conduct the broader activities permitted under
GLBA. However, there can be no assurance that this
will continue to be the case in the future.

Financial holding companies and bank holding
companies are required to obtain the approval of
the Federal Reserve Board before they may acquire
more than five percent of the voting shares of an
unaffiliated bank. Pursuant to the Riegle-Neal
Interstate Banking and Branching Efficiency Act of
1994 (the “Riegle-Neal Act”), the Federal Reserve
Board may approve an application for such an
acquisition without regard to whether the
transaction is prohibited under the law of any
state, provided that the acquiring bank holding
company, before or after the acquisition, does not
control more than 10% of the total amount
of deposits of insured depository institutions in
the U.S. or more than 30% (or such
greater or lesser amounts as permitted under state
law) of the total deposits of insured depository
institutions in the state in which the acquired
bank has its home office or a branch.

Regulation by Federal Reserve Board under GLBA:
Under GLBA’s system of “functional regulation,” the Federal Reserve Board acts as an “umbrella
regulator, ” and certain of JPMorgan Chase’s
subsidiaries are regulated directly by additional
authorities based upon the particular activities
of those subsidiaries. JPMorgan Chase Bank, N.A.,
and Chase Bank USA, N.A., are regulated by the
Office of the Comptroller of the Currency
(“OCC”). See “Other supervision and regulation”
below for a further description of the regulatory
supervision to which the Firm’s subsidiaries are
subject.

Dividend restrictions: Federal law imposes
limitations on the payment of dividends by national
banks. Dividends payable by JPMorgan Chase Bank,
N.A. and Chase Bank USA, N.A., as national bank
subsidiaries of JPMorgan Chase, are limited to the
lesser of the
amounts calculated under a “recent earnings” test
and an “undivided profits” test. Under the recent
earnings test, a dividend may not be paid if the
total of all dividends declared by a bank in any
calendar year is in excess of the current year’s
net income combined with the retained net income of
the two preceding years, unless the national bank
obtains the approval of the OCC. Under the
undivided profits test, a dividend may not be paid
in excess of a bank’s “undivided profits.” See Note
29 on page 199 for the amount of dividends that the
Firm’s principal bank subsidiaries could pay, at
January 1, 2009 and 2008, to their respective bank
holding companies without the approval of their
banking regulators.

In addition to the dividend restrictions described
above, the OCC, the Federal Reserve Board and the
FDIC have authority to prohibit or limit the
payment of dividends by the banking organizations
they supervise, including JPMorgan Chase and its
bank and bank holding

The risk-based capital ratio is determined by
allocating assets and specified off–balance sheet
financial instruments into four weighted
categories, with higher levels of capital being
required for the categories perceived as
representing greater risk. Under the guidelines,
capital is divided into two tiers: Tier 1 capital
and Tier 2 capital. The amount of Tier 2 capital
may not exceed the amount of Tier 1 capital. Total
capital is the sum of Tier 1 capital and Tier 2
capital. Under the guidelines, banking
organizations are required to maintain a total
capital ratio (total capital to risk-weighted
assets) of 8% and a Tier 1 capital ratio of 4%.

The federal banking regulators also have
established minimum leverage ratio guidelines. The
leverage ratio is defined as Tier 1 capital divided
by adjusted average total assets (which reflects
adjustments for disallowed goodwill and certain
intangible assets). The minimum leverage ratio is 3%
for bank holding companies that are considered
“strong” under Federal Reserve Board guidelines or
which have implemented the Federal Reserve Board’s
risk-based capital measure for market risk. Other
bank holding companies must have a minimum leverage
ratio of 4%. Bank holding companies may be expected
to maintain ratios well above the minimum levels,
depending upon their particular condition, risk
profile and growth plans.

The minimum risk-based capital requirements adopted
by the federal banking agencies follow the Capital
Accord of the Basel Committee on Banking
Supervision. In 2004, the Basel Committee published
a revision to the Accord (“Basel II”). U.S. banking
regulators published a final Basel II rule in
December 2007 which requires JPMorgan Chase to
implement Basel II at the holding company level, as
well as at certain of its key U.S. bank
subsidiaries. For additional information regarding
Basel II, see Regulatory capital on page 72.

Effective January 1, 2008, the SEC authorized
JPMorgan Securities to use the alternative method
of computing net capital for broker/dealers that
are part of Consolidated Supervised Entities as
defined by SEC rules. Accordingly, JPMorgan
Securities may calculate deductions for market risk
using its internal market risk models. For
additional information regarding the Firm’s
regulatory capital, see Regulatory capital on pages
71–73 and Note 30 on pages 200–201.

Federal Deposit Insurance Corporation Improvement Act:
The Federal Deposit Insurance Corporation
Improvement Act of 1991 (“FDICIA”) provides a
framework for regulation of depository institutions
and their affiliates, including parent holding
companies, by their federal banking regulators.
As part of that framework, the FDICIA requires the relevant
federal banking regulator to take “prompt
corrective action” with respect to a depository
institution if that institution does not meet
certain capital adequacy standards.

Supervisory actions by the appropriate federal
banking regulator under the “prompt corrective
action” rules generally depend upon an
institution’s classification within five capital
categories. The regulations apply only to banks and
not to bank holding companies such as JPMorgan
Chase; however, subject to limitations that may be
imposed pursuant to GLBA, the Federal Reserve Board
is authorized to take appropriate action at the
holding company level, based upon the
undercapitalized status of the holding company’s
subsidiary banking institutions. In certain
instances relating to an undercapitalized banking
institution, the bank holding company would be
required to guarantee the performance of the
undercapitalized subsidiary’s capital restoration
plan and might be liable for civil money damages
for failure to fulfill its commitments on that
guarantee.

Deposit Insurance: Under current FDIC regulations,
each depository institution is assigned to a risk
category based on capital and supervisory measures.
A depository institution is assessed insurance
premiums by the FDIC based on its risk category and
the amount of deposits held. During the fourth
quarter 2008, the amount of FDIC insurance coverage
for insured deposits was increased under the
EESA, generally from $100,000 per depositor to
$250,000 per depositor, and pursuant to the
Firm’s participation in the FDIC’s TLG Program insured deposits held in
noninterest-bearing transaction accounts are now
fully insured. These increases in insurance coverage are
scheduled to end on December 31, 2009. The FDIC has
stated its intention, as part of its proposed
Deposit Insurance Fund
restoration plan, to increase deposit insurance
assessments. On January 1, 2009, the FDIC increased
its assessment rates, and has proposed further rate
increases and changes to the current risk-based
assessment framework. In addition, as a result of the Firm’s
participation in the TLG Program, the Firm is required to pay
additional insurance premiums to the FDIC in an amount equal to an
annualized 10-basis points on balances in noninterest-bearing
transaction accounts that exceed the $250,000 deposit insurance limit,
determined on a quarterly basis.

Powers of the FDIC upon insolvency of an insured
depository institution: An FDIC-insured depository
institution can be held liable for any loss
incurred or expected to be incurred by the FDIC in
connection with another FDIC-insured institution
under common control with such institution being
“in default” or “in danger of default” (commonly
referred to as “cross-guarantee” liability). An FDIC
cross-guarantee claim against a depository
institution is generally superior in right of
payment to claims of the holding company and its
affiliates against such depository institution.

If the FDIC is appointed the conservator or
receiver of an insured depository institution upon
its insolvency or in certain other events, the
FDIC has the power: (1) to transfer any of the
depository institution’s assets and liabilities to
a new obligor without the approval of the
depository institution’s creditors; (2) to enforce
the terms of the depository institution’s
contracts pursuant to their terms; or (3) to
repudiate or disaffirm any contract or lease to
which the depository institution is a party, the
performance of which is determined by the FDIC to
be burdensome and the disaffirmation or
repudiation of which is determined by the FDIC to
promote the orderly administration of the
depository institution. The above provisions would
be applicable to obligations and liabilities of
JPMorgan Chase’s subsidiaries that are insured
depository institutions, such as JPMorgan Chase
Bank, N.A., and Chase Bank USA, N.A., including,
without limitation, obligations under senior or
subordinated debt issued by

those banks to investors (referred to below as
“public note holders”) in the public markets.

Under federal law, the claims of a receiver of an
insured depository institution for administrative
expense and the claims of holders of U.S. deposit
liabilities (including the FDIC, as subrogee of the
depositors) have priority over the claims of other
unsecured creditors of the institution, including
public noteholders and depositors in non-U.S.
offices, in the event of the liquidation or other
resolution of the institution. As a result, whether
or not the FDIC would ever seek to repudiate any
obligations held by public noteholders or
depositors in non-U.S. offices of any subsidiary of
the Firm that is an insured depository institution,
such as JPMorgan Chase Bank, N.A., or Chase Bank
USA, N.A., such persons would be treated
differently from, and could receive, if anything,
substantially less than the depositors in U.S.
offices of the depository.

The Bank Secrecy Act: The Bank Secrecy Act (“BSA”)
requires all financial institutions, including
banks and securities broker-dealers, to, among
other things, establish a risk-based system of
internal controls reasonably designed to prevent
money laundering and the financing of terrorism.
The BSA includes a variety of recordkeeping and
reporting requirements (such as cash and suspicious
activity reporting), as well as due
diligence/know-your-customer documentation
requirements. The Firm has established a global
anti-money laundering program in order to comply
with BSA requirements.

Other supervision and regulation: Under current
Federal Reserve Board policy, JPMorgan Chase is
expected to act as a source of financial strength
to its bank subsidiaries and to commit resources to
support these subsidiaries in circumstances where
it might not do so absent such policy. However,
because GLBA provides for functional regulation of
financial holding company activities by various
regulators, GLBA prohibits the Federal Reserve
Board from requiring payment by a holding company
or subsidiary to a depository institution if the
functional regulator of the payor objects to such
payment. In such a case, the Federal Reserve Board
could instead require the divestiture of the
depository institution and impose operating
restrictions pending the divestiture.

The bank subsidiaries of JPMorgan Chase are subject
to certain restrictions imposed by federal law on
extensions of credit to, and certain other
transactions with, the Firm and certain other
affiliates, and on investments in stock or
securities of JPMorgan Chase and those affiliates.
These restrictions prevent JPMorgan Chase and other
affiliates from borrowing from a bank subsidiary
unless the loans are secured in specified amounts.
See Note 29 on page 199.

The Firm’s banks and certain of its nonbank
subsidiaries are subject to direct supervision and
regulation by various other federal and state
authorities (some of which are considered
“functional regulators” under GLBA). JPMorgan
Chase’s national bank subsidiaries, such as
JPMorgan Chase Bank, N.A., and Chase Bank USA,
N.A., are subject to supervision and regulation by
the OCC and, in certain matters, by the Federal
Reserve Board and the FDIC. Supervision and
regulation by the responsible regulatory agency
generally includes comprehensive annual reviews of
all major aspects of the relevant

bank’s business and condition, and imposition of
periodic reporting requirements and limitations on
investments, among other powers.

The Firm conducts securities underwriting, dealing
and brokerage activities in the U.S. through
JPMorgan Securities and other broker-dealer
subsidiaries, all of which are subject to
regulations of the SEC, the Financial Industry
Regulatory Authority and the New York Stock
Exchange, among others. The Firm conducts similar
securities activities outside the U.S. subject to
local regulatory requirements. The operations of
JPMorgan Chase mutual funds also are subject to
regulation by the SEC.

The Firm has subsidiaries that are members of
futures exchanges in the U.S. and abroad and are
registered accordingly. In the U.S., three
subsidiaries are registered as futures commission
merchants, with other subsidiaries registered with
the Commodity Futures Trading Commission (the
“CFTC”) as commodity pool operators and commodity
trading advisors. These CFTC-registered
subsidiaries are also members of the National
Futures Association. The Firm’s U.S. energy
business is subject to regulation by the Federal
Energy Regulatory Commission. It is also subject to
other extensive and evolving energy, commodities,
environmental and other governmental regulation
both in the U.S. and other jurisdictions globally.

The types of activities in which the non-U.S.
branches of JPMorgan Chase Bank, N.A., and the
international subsidiaries of JPMorgan Chase may
engage are subject to various restrictions imposed
by the Federal Reserve Board. Those non-U.S.
branches and international subsidiaries also are
subject to the laws and regulatory authorities of
the countries in which they operate.

The activities of JPMorgan Chase Bank, N.A. and
Chase Bank USA, N.A. as consumer lenders also are
subject to regulation under various U.S. federal
laws, including the Truth-in-Lending, Equal Credit
Opportunity, Fair Credit Reporting, Fair Debt
Collection Practice and Electronic Funds Transfer
acts, as well as various state laws. These
statutes impose requirements on consumer loan
origination and collection practices.

Under the requirements imposed by GLBA, JPMorgan
Chase and its subsidiaries are required
periodically to disclose to their retail customers
the Firm’s policies and practices with respect to
the sharing of nonpublic customer information with
JPMorgan Chase affiliates and others, and the
confidentiality and security of that information.
Under GLBA, retail customers also must be given
the opportunity to “opt out” of
information-sharing arrangements with
nonaffiliates, subject to certain exceptions set
forth in GLBA.

ITEM 1A: RISK FACTORS

The following discussion sets forth some of the more important risk factors that could materially
affect our financial condition and operations. Other factors that could affect our financial
condition and operations are discussed in the “Forward-looking statements” section on page 115.
However, factors besides those discussed below, in MD&A or
elsewhere in this or other reports that we filed or furnished with the SEC, also could adversely
affect us. You should not consider any descriptions of such factors to be a complete set of all
potential risks that could affect us.

Our
results of operations have been, and may continue to be, adversely affected by U.S. and
international financial market and economic conditions.
Our businesses have been, and in the future will continue to be, materially affected by economic
and market conditions, including factors such as the liquidity of the global financial markets; the
level and volatility of debt and equity prices, interest rates and currency and commodities prices;
investor sentiment; corporate or other scandals that reduce confidence in the financial markets;
inflation; the availability and cost of capital and credit; the occurrence of natural disasters,
acts of war or terrorism; and the degree to which U.S. or international economies are expanding or
experiencing recessionary pressures. These factors can affect, among other things, the activity
level of clients with respect to the size, number and timing of transactions involving our
investment and commercial banking businesses, including our underwriting and advisory businesses;
the realization of cash returns from our private equity and principal investments businesses; the
volume of transactions that we execute for our customers and, therefore, the revenue we receive
from commissions and spreads; the number or size of underwritings we manage on behalf of clients;
and the willingness of financial sponsors or other investors to participate in loan syndications or
underwritings managed by us.

We generally maintain large trading portfolios in the fixed income, currency, commodity and equity
markets and we may have from time to time significant investment positions, including positions in
securities in markets that lack pricing transparency or liquidity. The revenue derived from
mark-to-market values of our businesses are affected by many factors, including our credit
standing; our success in proprietary positioning; volatility in interest rates and equity, debt and
commodities markets; credit spreads and availability of liquidity in the capital markets; and other
economic and business factors. We anticipate that revenue relating to our trading and principal
investment businesses will continue to experience volatility and there can be no assurance that
such volatility relating to the above factors or other conditions that may affect pricing or our
ability to realize returns from such investments could not materially adversely affect our
earnings.

The fees we earn for managing third-party assets are also dependent upon general economic
conditions. For example, a higher level of U.S. or non-U.S. interest rates or a downturn in trading
markets could affect the valuations of the third-party assets we manage or hold in custody, which,
in turn, could affect our revenue. Moreover, even in the absence of a market downturn, below-market
or sub-par performance by our investment management businesses could result in outflows of assets
under management and supervision and, therefore, reduce the fees that we receive.

Our consumer businesses are particularly affected by domestic economic conditions. Such conditions
include U.S. interest rates; the rate of unemployment; housing prices; the level of consumer
confidence; changes in consumer spending; and the number of personal bankruptcies, among others.
The deterioration of these conditions can diminish demand for the consumer businesses’ products and
services, or increase the cost to provide such products and services. In addition, adverse economic
conditions, such as declines in home prices, could lead to an increase in mortgage and other loan
delinquencies and higher net charge-offs, which can adversely affect our earnings.

During 2008, U.S. and global financial markets were extremely volatile and were materially and
adversely affected by a significant lack of liquidity, loss of confidence in the financial

sector,
disruptions in the credit markets, reduced business activity, rising unemployment, declining home
prices, and erosion of consumer confidence. These factors contributed to adversely affecting our
business, financial condition and results of operations in 2008 and there is no assurance when such
conditions will ameliorate.

If we do not effectively manage our liquidity, our business could be negatively affected.
Our liquidity is critical to our ability to operate our businesses, grow and be profitable. Some
potential conditions that could negatively affect our liquidity include illiquid or volatile
markets, diminished access to capital markets, unforeseen cash or capital requirements (including,
among others, commitments that may be triggered to special purpose entities (“SPEs”) or other
entities), difficulty or inability to sell assets, unforeseen
outflows of cash or collateral, and lack of market or customer
confidence in us or our prospects.
These conditions may be caused by events over which we have little or no control. The liquidity
crisis experienced in 2008 increased our cost of funding and limited our access to some of our
traditional sources of liquidity such as securitized debt offerings backed by mortgages, loans,
credit card receivables and other assets. If current market conditions continue, our liquidity
could be adversely affected.

The credit ratings of JPMorgan Chase & Co., JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. are
important in order to maintain our liquidity. A reduction in their credit ratings could have an
adverse effect on our access to
liquidity sources, increase our cost of funds, trigger additional collateral or funding
requirements, and decrease the number of investors and counterparties willing to lend to us,
thereby curtailing our business operations and reducing our profitability. Reduction in the ratings
of certain SPEs or other entities to which we have a funding or other commitment could also
negatively affect our liquidity where such ratings changes lead, directly or indirectly, to us
being required to purchase assets or otherwise provide funding. Critical factors in maintaining
high credit ratings include a stable and diverse earnings stream, strong capital ratios, strong
credit quality and risk management controls, diverse funding sources, and disciplined liquidity
monitoring procedures.

Our cost of obtaining long-term unsecured funding is directly related to our credit spreads (the
amount in excess of the interest rate of U.S. Treasury securities (or other benchmark securities)
of the same maturity that we need to pay to our debt investors). Increases in our credit spreads
can significantly increase the cost of this funding. Changes in credit spreads are continuous and
market-driven, and influenced by market perceptions of our creditworthiness. As such, our credit
spreads may be unpredictable and highly volatile.

As a holding company, we rely on the earnings of our subsidiaries for our cash flow and consequent
ability to pay dividends and satisfy our obligations. These payments by subsidiaries may take the
form of dividends, loans or other payments. Several of our principal subsidiaries are subject to
capital adequacy requirements or other regulatory or contractual restrictions on their ability to
provide such payments. Limitations in the payments we receive from our subsidiaries could
negatively affect our liquidity position.

The soundness of our customers, clients and counterparties, including other financial institutions,
could adversely affect us.
A number of our products expose us to credit risk, including loans, leases and lending commitments,
derivatives, trading account assets and assets held-for-sale. As one of the nation’s largest
lenders, we have exposures to many different

products
and counterparties, and the credit quality of
our exposures can have a significant impact on our earnings. We estimate and establish reserves for
credit risks and potential credit losses inherent in our credit exposure (including unfunded
lending commitments). This process, which is critical to our financial results and condition,
requires difficult, subjective and complex judgments, including forecasts of how these economic
conditions might impair the ability of our borrowers to repay their loans. As is the case with any
such assessments, there is always the chance that we will fail to identify the proper factors or
that we will fail to accurately estimate the impact of factors that we identify. Any such failure
could result in increases in delinquencies and default rates.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or
other relationships. We routinely execute transactions with counterparties in the financial
services industry, including brokers and dealers, commercial banks, investment banks, mutual and
hedge funds, and other institutional clients. Many of these transactions expose us to credit risk
in the event of default by the counterparty or client, which can be exacerbated during periods of
market illiquidity, such as experienced in 2008. During such periods, our credit risk also may be
further increased when the collateral held by us cannot be realized upon or is liquidated at prices
that are not sufficient to recover the full amount of the loan or derivative exposure due to us. In
addition, disputes with counterparties as to the valuation of collateral significantly increases in
times of market stress and illiquidity. There is no assurance that any such losses would not
materially and adversely affect our results of operations or earnings.

As an example of the risks associated with our relationships with other financial institutions is
the collapse of Lehman Brothers Holdings Inc. (“LBHI”). On September 15, 2008, LBHI filed a
voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the
“Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York, and
thereafter several of its subsidiaries also filed voluntary petitions for relief under Chapter 11
of the Bankruptcy Code in the court (LBHI and such subsidiaries collectively, “Lehman”). On
September 19, 2008, a liquidation case under the Securities Investor Protection Act was commenced
in the United States District Court for the Southern District of New York for Lehman Brothers Inc.
(“LBI”), LBHI’s U.S. broker-dealer subsidiary, and the court now presides over the LBI SIPA
liquidation case. We were LBI’s clearing bank and are the largest secured creditor in the Lehman
and LBI cases, according to Lehman’s schedules. We anticipate that claims may be asserted against us
and/or our security interests, including by the LBHI Creditors Committee, the SIPA Trustee
appointed in the LBI liquidation case, the principal acquiror of LBI’s assets, and others in
connection with Lehman and LBI cases. We intend to defend ourself against any such claims.

As a result of the current economic environment there is a greater likelihood that more of our
customers or counterparties could become delinquent on their loans or other obligations to us
which, in turn, could result in a higher level of charge-offs and provision for credit losses, or
requirements that we purchase assets or provide other funding, any of which could adversely affect
our financial condition. Moreover, a significant deterioration in the credit quality of one of our
counterparties could lead to concerns about the credit quality of other counterparties in the same
industry, thereby exacerbating our credit risk exposure, and increasing the losses, including
mark-to-market losses, we could incur in our trading, clearing, and proprietary businesses.

Concentration of credit and market risk could increase the potential for significant losses.
We have exposure to increased levels of risk when a number of customers are engaged in similar
business activities or activities in the same geographic region, or when they have similar economic
features that would cause their ability to meet contractual obligations to be similarly affected by
changes in economic conditions. We regularly monitor various segments of our portfolio exposures to
assess potential concentration risks. Our efforts to diversify or hedge our credit portfolio
against concentration risks may not be successful and any concentration of credit risk could
increase the potential for significant losses in our credit portfolio. In addition, disruptions in
the liquidity or transparency of the financial markets may result in our inability to sell,
syndicate or realize upon securities, loans or other instruments or positions held by us,
thereby leading to increased concentrations

of such positions. These concentrations could expose us to
losses if the mark-to-market value of the securities, loans or other instruments or positions
decline causing us to take write downs. Moreover, the inability to reduce our positions not only
increases the market and credit risks associated with such positions, but also increases the level
of risk-weighted assets on our balance sheet, thereby increasing our capital requirements and
funding costs, all of which could adversely affect our
businesses’ operations and profitability.

Our framework for managing risks may not be effective in mitigating risk and loss to us.
Our risk management framework seeks to mitigate risk and loss to us. We have established processes
and procedures intended to identify, measure, monitor, report and analyze the types of risk to
which we are subject, including liquidity risk, credit risk, market risk, interest rate risk,
operational risk, legal and fiduciary risk, reputational risk and private equity risk, among
others. However, as with any risk management framework, there are inherent limitations to our risk
management strategies as there may exist, or develop in the future, risks that we have not
appropriately anticipated or identified. If our risk management framework proves ineffective, we
could suffer unexpected losses and could be materially adversely affected.

Our risk management strategies may not be effective because in a difficult or less liquid market
environment other market participants may be attempting to use the same or similar strategies to
deal with the difficult market conditions. In such circumstances, it may be difficult for us to
reduce our risk positions due to the activity of such other market participants.

Our derivatives businesses may expose us to unexpected market, credit and operational risks that
could cause us to suffer unexpected losses. Severe declines in asset values, unanticipated credit
events, or unforeseen circumstances that may cause previously uncorrelated factors to become
correlated may create losses resulting from risks not appropriately taken into account in the
development, structuring or pricing of a derivative instrument. In addition, certain of our
derivative transactions require the physical settlement by delivery of securities, commodities or
obligations that we do now own; if we are not able to obtain such securities, commodities or
obligations within the required timeframe for delivery, this could cause us to forfeit payments
otherwise due to us and could result in settlement delays, which could damage our reputation and
ability to transact future business. In addition, many derivative transactions are not cleared and
settled through a central clearinghouse or exchange, and they may not always be confirmed or
settled by counterparties on a timely basis. In these situations, we are subject to heightened
credit and operational risk, and in the event of a default, we may find the contract more difficult
to enforce. Further, as new and more complex derivative products are created, disputes regarding
the terms or the settlement procedures of the contracts could arise, which could force us to incur
unexpected costs, including transaction and legal costs, and impair our ability to manage
effectively our risk exposure from these products.

Many of our hedging strategies and other risk management techniques have a basis in historic market
behavior, and all

such strategies and techniques are based to some degree on management’s
subjective judgment. For example, many models used by us are based on assumptions regarding
correlations among prices of various asset classes or other market indicators. In times of market
stress, such as occurred during 2008, or in the event of other unforeseen circumstances, previously
uncorrelated indicators may become correlated, or conversely, previously correlated indicators may
make unrelated movements. These sudden market movements or unanticipated or unidentified market or
economic movements have in some circumstances limited the effectiveness of our risk management
strategies, causing us to incur losses. In addition, as our businesses grow and the markets in
which they operate continue to evolve, our risk management framework may not always keep sufficient
pace with those changes. For example, there is the risk that the credit and market risks associated
with new products or new business strategies may not be appropriately identified, monitored or
managed. There can be no assurance that our risk management framework, including our underlying
assumptions or strategies, will at all times be accurate and effective.

Our operations are subject to risk of loss from unfavorable economic, monetary, political, legal
and other developments in the United States and around the world.
Our businesses and earnings are affected by the fiscal and other policies that are adopted by
various regulatory authorities of the United States, non-U.S. governments and international
agencies.

The Board of Governors of the Federal Reserve System regulates the supply of money and credit in
the United States. Its policies determine in large part the cost of funds for lending and investing
and the return earned on those loans and investments. The market impact from such policies can also
materially decrease the value of financial assets that we hold, such as debt securities and
mortgage servicing rights (“MSRs”). Its policies also can adversely affect borrowers, potentially
increasing the risk that they may fail to repay their loans or satisfy their obligations to us.
Changes in Federal Reserve policies are beyond our control and, consequently, the impact of these
changes on our activities and results of operations is difficult to predict.

Our businesses and revenue are also subject to the risks inherent in maintaining international
operations and in investing and trading in securities of companies worldwide. These risks include,
among others, risk of loss from the outbreak of hostilities or acts of terrorism and various
unfavorable political, economic, legal or other developments, including social or political
instability, changes in governmental policies or policies of central banks, expropriation,
nationalization, confiscation of assets, price controls, capital controls, exchange controls, and
changes in laws and regulations. Further, various countries in which we operate or invest, or in
which we may do so in the future, have in the past experienced severe economic disruptions,
including extreme currency fluctuations, high inflation, or low or negative growth, among other
negative conditions. Crime, corruption, war or military actions, acts of terrorism and a
lack of an established legal and regulatory framework are additional challenges in some of these
countries, particularly in the emerging markets. Revenue from international operations and trading
in non-U.S. securities may be subject to negative fluctuations as a result

of the above
considerations. The impact of these fluctuations could be accentuated as some trading markets are
smaller, less liquid and more volatile than larger markets. Also, any of the above-mentioned events
or circumstances in one country can and has in the past, affected our operations and investments
in another country or countries. Any such unfavorable conditions or developments could have an
adverse impact on our business and results of operations.

The emergence of a widespread health emergency or pandemic also could create economic or financial
disruption that could negatively affect our revenue and operations or impair our ability to manage
our businesses in certain parts of the world.

Our power generation and commodities activities are subject to extensive regulation, potential
catastrophic events and environmental risks and regulation that may expose it to significant cost
and liability.
We engage in power generation, and in connection with the commodities activities of our Investment
Bank, we engage in the storage, transportation, marketing or trading of several commodities,
including metals, agricultural products, crude oil, oil products, natural gas, electric power,
emission credits, coal, freight, and related products and indices. As a result of these activities,
we are subject to extensive and evolving energy, commodities, environmental, and other governmental
laws and regulations. We expect laws and regulations affecting our power generation and commodities
activities to expand in scope and complexity. We may incur substantial costs in complying with
current or future laws and regulations and the failure to comply with these laws and regulations
may result in substantial civil and criminal fines and penalties. In addition, liability may be
incurred without regard to fault under certain environmental laws and regulations for remediation
of contaminations. Our power generation and commodities activities also further exposes us to the
risk of unforeseen and catastrophic events, including natural disasters, leaks, spills, explosions,
release of toxic substances, fires, accidents on land and at sea, wars, and terrorist attacks that
could result in personal injuries, loss of life, property damage, damage to our reputation and
suspension of operations. In addition, our power generation activities are subject to disruptions,
many of which are outside of our control, from the breakdown or failure of power generation
equipment, transmission lines or other equipment or processes, and the contractual failure of
performance by third-party suppliers or service providers, including the failure to obtain and
deliver raw materials necessary for the operation of power generation facilities. We attempt to
mitigate our risks, but our actions may not prove adequate to address every contingency. In
addition, insurance covering some of these risks may not be available, and the proceeds, if any,
from insurance recovery may not be adequate to cover liabilities with respect to particular
incidents. As a result, our financial condition and results of operations may be adversely affected
by such events.

We rely on our systems, employees and certain counterparties, and certain failures could materially
adversely affect our operations.
Our businesses are dependent on our ability to process, record and monitor a large number of
increasingly complex transactions. If any of our financial, accounting, or other data

processing
systems fail or have other significant shortcomings, we could be materially adversely affected. We
are similarly dependent on our employees. We could be materially adversely affected if one of our
employees causes a significant operational break-down or failure, either as a result of human error
or where an individual purposefully sabotages or fraudulently manipulates our operations or
systems. Third parties with which we do business could also be sources of operational risk to us,
including relating to breakdowns or failures of such parties’ own systems or employees. Any of
these occurrences could diminish our ability to operate one or more of our businesses, or result in
potential liability to clients, reputational damage and regulatory intervention, any of which could
materially adversely affect us.

If personal, confidential or proprietary information of customers or clients in our possession were
to be mishandled or misused, we could suffer significant regulatory consequences, reputational
damage and financial loss. Such mishandling or misuse could include, for example, if such
information were erroneously provided to parties who are not permitted to have the information,
either by fault of our systems, employees, or counterparties, or where such information is
intercepted or otherwise inappropriately taken by third parties.

We may be subject to disruptions of our operating systems arising from events that are wholly or
partially beyond our control, which may include, for example, computer viruses or electrical or
telecommunications outages, natural disasters, disease pandemics or other damage to property or
physical assets, or events arising from local or larger scale politics, including terrorist acts.
Such disruptions may give rise to losses in service to customers and loss or liability to us.

In a firm as large and complex as us, lapses or deficiencies in internal control over financial
reporting may occur from time to time, and there is no assurance that significant deficiencies or
material weaknesses in internal controls may not occur in the future. In addition, there is the
risk that our controls and procedures as well as business continuity and data security systems
prove to be inadequate. Any such failure could affect our operations and could materially adversely
affect our results of operations by requiring us to expend significant resources to correct the
defect, as well as by exposing us to litigation, regulatory fines or penalties or losses not
covered by insurance.

We operate within a highly regulated industry and our business and results are
significantly affected by the laws and regulations to which we are subject.
We operate within a highly regulated industry. We are subject to regulation under state and federal
laws in the U.S., as well as the applicable laws of each of the various other jurisdictions outside
the U.S. in which we do business. These laws and regulations affect the type and manner in which we
do business and may limit our ability to expand our product offerings, pursue acquisitions, or
restrict the scope of operations and services provided.

Recent market and economic conditions have led to new legislation and numerous proposals for
changes in the regulation of the financial services industry, including significant additional
legislation and regulation in the United States. In response to such market and economic
conditions, the United States government, particularly the U.S. Department of the Treasury, the
Board of Governors of the Federal Reserve System, the FDIC, and foreign governments,

have taken a
variety of extraordinary measures designed to restore confidence in the financial markets, increase
liquidity and to strengthen financial institutions. For example, on October 3, 2008 and on February17, 2009, the EESA and the ARRA, respectively, were signed into law. These laws are
intended to provide fiscal stimulus and stability to the U.S. economy, by among other things,
permitting the U.S. Treasury to make direct investments in financial institutions pursuant to the
Capital Purchase Program. There can be no assurance, however, as to the actual impact that these
laws and their implementing regulations, or any other governmental program, will have on the
financial markets. The failure of the financial markets to stabilize and a continuation or
worsening of current financial market and economic conditions could continue to materially and
adversely affect our business, financial condition, results of operations, access to credit or the
trading price of our common stock.

Participation in current or future government programs adopted in response to recent market events
and economic conditions may subject us to restrictions and additional oversight on the manner in
which we operate our business. We are currently participating in the Capital Purchase Program, and
under the terms of the program, as amended by the ARRA, the consent of the U.S. Treasury is
required for us to, among other things, increase our common stock
dividend from the amount of the last quarterly stock dividend
declared by us prior to October 14, 2008 or, except in limited
circumstances, repurchase our common stock or other preferred stock unless the Series K Preferred
Stock that was issued to the U.S. Treasury under the Capital Purchase Program has been redeemed or
the U.S. Treasury has transferred all of the Series K Preferred Stock to a third party. The ARRA
also imposes restrictions on our ability to pay incentive compensation to certain of our employees.
There can be no assurance that any additional restrictions imposed by reason of our participation
in the Capital Purchase Program or other government programs will not
have an adverse effect on our
business, results of operations and financial condition.

New
legislation and regulatory changes could cause business disruptions, result in significant loss of
revenue, limit our ability to pursue business opportunities we might otherwise consider engaging
in, impact the value of assets that we hold, require us to change certain of our business
practices, impose additional costs on us or otherwise adversely
affect our business. For example, on December 18, 2008, the Board of Governors of the Federal Reserve System adopted
enhanced regulations for credit cards through amendments to Regulation Z, which implements the
Truth-in-Lending Act, and also new regulations governing unfair or deceptive acts or practices
under the Federal Trade Commission Act. These regulatory changes will require us to invest
significant management attention and resources to make the necessary disclosure and system changes,
and could adversely affect our business.

Additional legislation and regulations may by enacted or promulgated in the future, and we are
unable to predict the form such legislation or regulation may take, or the degree to which we would
need to modify our businesses or operations to comply with such legislation or regulation. For
example, proposed legislation has been introduced in Congress that would amend to the Bankruptcy
Code to permit modifications of certain mortgages that are secured by a Chapter 13 debtor’s
principal residence. Proposed legislation has also been introduced in Congress that would, among
other things, prescribe when interest can be charged on revolving credit card accounts, prescribe
when and how interest rates can be increased, limit events of default that can result in interest
rate increases on existing balances, restrict the imposition of certain fees, require a specified
cutoff hour when payments must be credited to accounts, prescribe how payments must be allocated to
outstanding balances on accounts and restrict the issuance of credit cards for persons under 21
years of age except in certain circumstances. There can be no assurance that if any such
legislation were enacted that it would not have an adverse effect on our business, results of
operations or financial condition.

If we do
not comply with the legislation and regulations that apply to our
operations, we may be subject to fines, penalties or
material restrictions on our businesses in the jurisdiction where the violation occurred. In recent
years, regulatory oversight and enforcement have increased substantially, imposing additional costs
and increasing the potential risks associated with our operations. If this regulatory trend
continues, it could adversely affect our operations and, in turn, our financial results. In
addition, adverse publicity and damage to our reputation arising from the failure or perceived
failure to comply with legal, regulatory or contractual requirements could affect our ability to
attract and retain customers or to maintain access to capital markets, which could adversely affect
our financial condition.

We face significant legal risks, both from regulatory investigations and proceedings and from
private actions brought against us.
We are named as a defendant or are otherwise involved in various legal proceedings, including class
actions and other litigation or disputes with third parties, as well as investigations or
proceedings brought by regulatory agencies. Actions brought against us may result in judgments,
settlements, fines, penalties or other results adverse to us, which could materially adversely
affect our business, financial condition or results of operation, or cause us serious reputational
harm. As a participant in the financial services industry, it is likely we will continue to
experience a high level of litigation and regulatory scrutiny and investigations related to our
businesses and operations.

There is increasing competition in the financial services industry which may adversely affect our
results of operations.
We operate in a highly competitive environment and we expect competitive conditions to continue to
intensify as continued merger activity in the financial services industry produces larger,
better-capitalized and more geographically diverse companies that are capable of offering a wider
array of financial products and services at more competitive prices. Consolidations in the
financial services industry increased substantially during 2008, as several major U.S.
financial institutions merged, were forced to sell assets and, in some cases failed.

We also face an increasing array of competitors. Competitors include other banks, brokerage firms,
investment banking companies, merchant banks, hedge funds, insurance companies, mutual fund
companies, credit card companies, mortgage banking companies, trust companies, securities
processing companies, automobile financing companies, leasing companies, e-commerce and other
Internet-based companies, and a variety of other financial services and advisory companies.
Technological advances and the growth of e-commerce have made it possible for non-depository
institutions to offer products and services that traditionally were banking products, and for
financial institutions and other companies to provide electronic and Internet-based financial
solutions, including electronic securities trading. Our businesses generally compete on the basis
of the quality and variety of our products and services, transaction execution, innovation,
reputation and price. Ongoing or increased competition in any one or all of these areas may put
downward pressure on prices for our products and services or may cause us to lose market share.
Increased competition also may require us to make additional capital investment in our businesses
in order to remain competitive. These investments may increase expense or may require us to extend
more of our capital on behalf of clients in order to execute larger, more competitive transactions.
There can be no assurance that the significant and increasing competition in the financial services
industry will not materially adversely affect our future results of operations.

Our acquisitions and the integration of acquired businesses may not result in all of the benefits
anticipated.
We have in the past and may in the future seek to grow our business by acquiring other businesses.
There can be no assurance that our acquisitions will have the anticipated positive results,
including results relating to: the total cost of integration; the time required to complete the
integration; the amount of longer-term cost savings; the overall performance of the combined
entity; or an improved price for our common stock. Integration of an acquired business can be
complex and costly, sometimes including combining relevant accounting and data processing systems
and management controls, as well as managing relevant relationships with employees, clients,
suppliers and other business partners. Integration efforts could divert management attention and
resources, which could adversely affect our operations or results.

Given the continued market volatility and uncertainty, we may continue to experience increased
credit costs or need to take additional markdowns and allowances for loan losses on the assets and
loans acquired in the merger (the “Bear Stearns merger”)
by and among JPMorgan Chase and The Bear Stearns Companies Inc. (“Bear Stearns”) and in connection with the acquisition of Washington Mutual Bank’s (“Washington Mutual”) banking operations (the “Washington Mutual transaction”) that could
negatively affect our financial condition and results of operations in the future. There is no
assurance that as our integration efforts continue in connection with these transactions, other
unanticipated costs or losses will not be incurred.

Acquisitions may also result in business disruptions that cause us to lose customers or cause
customers to remove their accounts from us and move their business to competing financial
institutions. It is possible that the integration process related to acquisitions could result in
the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and
policies that could adversely affect our ability to maintain relationships with clients, customers,
depositors and employees. The loss of key employees in connection with an acquisition could
adversely affect our ability to successfully conduct our business.

Damage to our reputation could damage our businesses.
Maintaining a positive reputation is critical to our attracting and maintaining customers,
investors and employees. Damage to our reputation can therefore cause significant harm to our
business and prospects. Harm to our reputation can arise from numerous sources, including, among
others, employee misconduct, litigation or regulatory outcomes, failing to deliver minimum
standards of service and quality, compliance failures, unethical behavior, and the activities of
customers and counterparties. Further, negative publicity regarding us, whether or not true, may
also result in harm to our prospects.

We could suffer significant reputational harm if we fail to properly identify and manage potential
conflicts of interest. Management of potential conflicts of interests has become increasingly
complex as we expand our business activities through more numerous transactions, obligations and
interests with and among our clients. The failure to adequately address, or the perceived failure
to adequately address, conflicts of interest could affect the willingness of clients to deal with
us, or give rise to litigation or enforcement actions. Therefore, there can be no assurance that
conflicts of interest will not arise in the future that could cause material harm to us.

Our ability to attract and retain qualified employees is critical to the success of our business
and failure to do so may materially adversely affect our performance.
Our employees are our most important resource and, in many areas of the financial services
industry, competition for qualified personnel is intense. The executive compensation restrictions
currently, or that may in the future may be, imposed on us as a result of our participation in the
Capital Purchase Program or other government programs, may adversely affect our ability to attract
and retain qualified senior management and employees. If we are unable to continue to retain and
attract qualified employees, our performance, including our competitive position, could be
materially adversely affected.

Our financial statements are based in part on assumptions and estimates which, if wrong, could
cause unexpected losses in the future.
Pursuant to accounting principles generally accepted in the United States of America,
we are required to use certain assumptions and estimates in preparing our financial statements,
including in determining credit loss reserves, reserves related to litigations and the fair value
of certain assets and liabilities, among other items. If assumptions or estimates underlying our
financial statements are incorrect, we may experience material losses.

For example, we make judgments in connection with our consolidation analysis of SPEs. If it is
later determined that non-consolidated SPEs should be consolidated, this could negatively affect
our Consolidated Balance Sheets, related funding requirements, capital ratios and, if the SPEs’
assets include unrealized losses, could require us to recognize those losses.

Certain of our financial instruments, including trading assets and liabilities, available-for-sale securities, certain loans, MSRs, private equity investments, structured notes and certain
repurchase and resale agreements, among other items, require a determination of their fair value in
order to prepare our financial statements. Where quoted market prices are not available, we may
make fair value determinations based on internally developed models or other means which ultimately
rely to some degree on management judgment. Some of these and other assets and liabilities may have
no direct observable price levels, making their valuation particularly subjective, being based on
significant estimation and judgment. In addition, sudden illiquidity in markets or declines in
prices of certain loans and securities may make it more difficult to value certain balance sheet
items, which may lead to the possibility that such valuations will be subject to further change or
adjustment and could lead to declines in our earnings.

ITEM 1B: UNRESOLVED SEC STAFF COMMENTS

None.

ITEM 2: PROPERTIES

JPMorgan
Chase’s headquarters is located
in New York City at 270 Park Avenue, which is a
50-story office building owned by JPMorgan Chase.
This location contains approximately 1.3 million
square feet of space. The building is currently
undergoing a major renovation in five stages. The
design seeks to attain the highest sustainability
rating for renovations of existing buildings under
the Leadership in Energy and Environmental Design
(“LEED”) Green Building Rating System. The
renovation of the top 15 floors is complete. By
year-end 2009, the next 19 floors are expected to
be complete and the mechanical infrastructure
refresh will be substantially complete with the
other stages to follow in the multi-year program.

In connection with the Bear Stearns merger,
JPMorgan Chase acquired 383 Madison Avenue in New
York City, a 45-story, 1.1 million square-foot
office building on land which is subject to a
ground lease for an additional 88 years. This
building serves as the U.S. headquarters of
JPMorgan Chase’s Investment Bank.

In total, JPMorgan Chase owned or leased
approximately 13.0 million square feet of
commercial office space and retail space in New
York City at December 31, 2008. JPMorgan Chase and its
subsidiaries also own or lease significant
administrative and operational facilities in
Houston and Dallas, Texas (4.8 million square
feet); Chicago, Illinois (4.0 million square
feet); Columbus, Ohio (2.7 million square
feet); Seattle, Washington (1.6 million square
feet); Phoenix, Arizona (1.4 million square
feet); Jersey City, New Jersey (1.2 million square
feet); San Francisco, California (1.1 million square
feet); Wilmington, Delaware (1.0 million square
feet); Tampa, Florida (1.0 million square feet); San
Antonio, Texas (1.0 million square feet); and 5,474
retail branches in 23 states. At December 31, 2008, the Firm occupied
approximately 75.9 million total square feet of
space in the United States.

At
December 31, 2008, the Firm managed and occupied approximately 3.8
million total square feet of space in the United
Kingdom, Europe, Middle East and Africa. In the
United Kingdom, JPMorgan Chase leased
approximately 2.6 million square feet of office
space and owned a 360,000 square-foot operations
center at December 31, 2008.

In 2008, JPMorgan Chase acquired a 999-year
leasehold interest in land at Canary Wharf,
London. It is intended to be the future site for
construction of a new European headquarters
building, which can contain up
to approximately 1.9 million square feet of space
and have up to five trading floors of
approximately 80,000 square feet each. JPMorgan
Chase, by agreement with the developer, has the
ability to defer commencement of the main
construction through at least October 2010. The
building design will strive to achieve the highest
possible environmental efficiency rating.

In addition, JPMorgan Chase and its subsidiaries
occupy offices and other administrative and
operational facilities in the Asia Pacific region,
Latin America and Canada under various types of
ownership and leasehold agreements, aggregating
approximately 3.2 million total square feet of
space at December 31, 2008. The properties occupied by JPMorgan Chase
are used across all of the Firm’s business segments
and for corporate purposes.

JPMorgan Chase continues to evaluate its current
and projected space requirements and may determine
from time to time that certain of its premises and
facilities are no longer necessary for its
operations. There is no assurance that the Firm
will be able to dispose of any such excess premises
or that it will not incur charges in connection
with such dispositions. Such disposition costs may
be material to the Firm’s results of operations in
a given period. For a discussion of occupancy
expense, see the Consolidated Results of Operations
discussion on pages 33–37.

ITEM 3: LEGAL PROCEEDINGS

Bear Stearns Shareholder Litigation and Related
Matters. Various shareholders of Bear Stearns have
commenced purported class actions against Bear
Stearns and certain of its former officers and/or
directors on behalf of all persons who purchased or
otherwise acquired common stock of Bear Stearns
between December 14, 2006 and March 14, 2008 (the
“Class Period”). The actions, originally commenced
in several United States District Courts, allege
that the defendants issued materially false and
misleading statements regarding Bear Stearns’
business and financial results and that, as a
result of those false statements, Bear Stearns’
common stock traded at artificially inflated prices
during the Class Period. In connection with these
allegations, the complaints assert claims for
violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. Separately,
several individual shareholders of Bear Stearns
have commenced or threatened to commence arbitration proceedings and lawsuits
asserting claims similar to those in the putative
class actions.

In addition, Bear Stearns and certain of its former
officers and/or directors have also been named as
defendants in a number of putative class actions
commenced in the United States District Court for
the Southern District of New York purporting to
represent the interests of participants in the Bear
Stearns Employee Stock Ownership Plan (“ESOP”)
during the time period of December 2006 through the

date of
the complaints. These
actions allege defendants breached their fiduciary
duties
to plaintiffs and to the other participants and
beneficiaries of the ESOP by (a) failing to
prudently manage the ESOP’s investment in Bear
Stearns securities; (b) failing to communicate fully
and accurately about the risks of the ESOP’s
investment in Bear Stearns stock; (c) failing to
avoid or address alleged conflicts of interest; and
(d) failing to monitor those who managed and
administered the ESOP. In connection with these
allegations, each plaintiff asserts claims for
violations under various sections of the Employee
Retirement Income Security Act (“ERISA”) and seeks
reimbursement to the ESOP for all losses, an
unspecified amount of monetary damages and
imposition of a consecutive trust.

Furthermore, former members of Bear Stearns’ Board
of Directors and certain of Bear Stearns’ former
executive officers have been named as defendants in
two purported shareholder derivative suits, each of
which was commenced in the United States District
Court for the Southern District of New York. Bear
Stearns was named as a nominal defendant in both
actions. By court order dated February 14, 2008,
the actions were consolidated. A consolidated
amended complaint was filed on March 3, 2008,
asserting claims for breach of fiduciary duty,
violations of federal securities laws, waste of
corporate assets and gross mismanagement, unjust
enrichment, abuse of control and indemnification
and contribution in connection with the losses
sustained by Bear Stearns as a result of its
purchases of sub-prime loans and certain
repurchases of its own common stock. Certain
individual defendants are also alleged to have sold
their holdings of Bear Stearns common stock
while in possession of material nonpublic
information. The amended complaint seeks
compensatory damages in an unspecified amount and
an order directing Bear Stearns to improve its
corporate governance procedures.

On August 18, 2008, the Judicial Panel on
Multidistrict Litigation (“MDL Panel”) issued a
Transfer Order joining for pre-trial purposes
before the United States District Court for the
Southern District of New York all then-pending
securities and ERISA actions, as well as any
later-filed actions, making allegations concerning
“whether Bear Stearns and certain of its current
and former officers and directors knowingly made
material misstatements or omissions concerning the
company’s financial health that misled investors
and caused investor losses when the company’s stock
price fell in March 2008.” The consolidated
shareholders’ derivative lawsuit was also the
subject of the Transfer order. All such actions
were assigned to District Judge Robert Sweet. By
order dated January 5, 2009, District Judge Sweet
ordered the various putative securities class
actions to be consolidated, and ordered that the
putative ERISA class actions be separately
consolidated. The Court also appointed lead
plaintiffs and lead plaintiffs’ counsel in both
consolidated actions and appointed lead plaintiffs’
counsel in the consolidated shareholder derivative
action.

Bear Stearns Merger Litigation. Seven putative
class actions (five that were commenced in New York
and two that were commenced in Delaware) were
consolidated in
New York State Court in Manhattan under the caption
In re Bear Stearns Litigation. Bear Stearns, as
well as its former directors and certain of its former
executive officers, were named as defendants.
JPMorgan Chase was also named as a defendant. The
actions, which were filed in the Supreme Court of
the New York State

Court, allege, among other things, that the
individual defendants breached their fiduciary
duties and obligations to Bear Stearns’
shareholders by agreeing to the proposed merger.
The Firm was alleged to have aided and abetted the
alleged breaches of fiduciary duty; breached its
fiduciary duty as controlling
shareholder/controlling entity; tortuously
interfered with the Bear Stearns shareholders’
voting rights; and was also alleged to have been
unjustly enriched. Plaintiffs initially sought to
enjoin the proposed merger and enjoin the Firm from
voting certain shares acquired by the Firm in
connection with the proposed merger. The plaintiffs
subsequently informed the Court that they were
withdrawing that motion but amended the
consolidated complaint to pursue claims, which
included a claim for an unspecified amount of
compensatory damages. In December 2008, the court ruled in favor of
us and other defendants on our and their motion for summary judgment.
As a result, the case has been dismissed pending the plaintiff’s
appeal from the summary judgment ruling.

Municipal Derivatives Investigation and Antitrust
Litigation. The New York field office of the
Department of Justice’s Antitrust Division and the
Philadelphia Office of the SEC have been conducting
parallel investigations of JPMorgan Chase and Bear
Stearns for possible antitrust and securities
violations in connection with the bidding or sale
of guaranteed investment contracts and derivatives
to municipal issuers. The principal focus of the
investigations to date has been the period 2001 to
2005. A group of state attorney generals and the OCC
also opened investigations into the same underlying
conduct. JPMorgan Chase has been cooperating with
those investigations and has produced documents and
other information.

On March 18, 2008, the Philadelphia Office of the
SEC provided to
JPMorgan Securities a Wells Notice that it
intended to bring civil charges in connection with
its investigations. JPMorgan Securities has
responded to that Wells Notice. It also responded
to a separate Wells Notice that that Office
provided to Bear, Stearns & Co. Inc. (now known as J.P. Morgan
Securities Inc.) on February1, 2008.

In addition, beginning in March 2008, purported
class action lawsuits and individual actions have
been filed against JPMorgan Chase and Bear Stearns,
as well as numerous other providers and brokers
involved in the market for a variety of financial
instruments related to municipal bonds and referred
to collectively by plaintiffs as “municipal
derivatives” (the “Municipal Derivatives
Actions”), for alleged antitrust violations in
connection
with the bidding or sale of “municipal
derivatives.” The MDL Panel ordered the antitrust
actions relating to “municipal derivatives”
coordinated for pretrial proceedings in the United
States District Court for the Southern District of
New York (the “MDL court”). On August 22, 2008,
certain class plaintiffs filed a consolidated class
action complaint alleging violations of Section 1
of the Sherman Act based on the alleged conspiracy
described above. On October 21, 2008, defendants
filed a joint motion to dismiss the consolidated
class action complaint. The MDL court declined to
stay discovery pending disposition of the motions
to dismiss.

There are a number of other actions that are
proceeding separately from the consolidated class
action complaint. These include purported class
actions under the Sherman Act and California state
law as well as individual actions that state
claims solely under California state law. In
addition, there are several actions that have been

noticed as
a tag-along action to the MDL Panel
and are awaiting transfer to the MDL court.

Bear Stearns Hedge Fund Matters. Bear Stearns,
certain of its current or former subsidiaries,
including Bear Stearns Asset Management, Inc.
(“BSAM”) and Bear Stearns & Co. Inc., and certain current or
former employees have been named as defendants
(“Bear Stearns defendants”) in a number of actions
relating to the Bear Stearns High Grade Structured
Credit Strategies Master Fund, Ltd. (the “High
Grade Fund”) and the Bear Stearns High Grade
Structured Credit Strategies Enhanced Leverage
Master Fund, Ltd. (the “Enhanced Leverage Fund”)
(collectively, the “Funds”). BSAM served as
investment manager for both of the Funds, which
were organized such that there were U.S. and Cayman
Islands “feeder funds” that invested substantially
all their assets, directly or indirectly, in the
Funds. The Funds are in liquidation.

The Bear Stearns defendants have been sued in five
civil actions in United States District Court for
the Southern District of New York. The Joint
Voluntary Liquidators of the Cayman Islands feeder funds has filed a complaint asserting claims for,
among other things, fraud, breach of fiduciary
duty, breach of contract, recklessness, gross
negligence, negligence, and unjust enrichment. Also
joining the Liquidators as plaintiffs are two
purported investors in the U.S. feeder funds. In
addition to individual claims, these two plaintiffs
purport to assert derivative actions with the U.S.
feeder funds as nominal defendants and seek damages
of not less than $1.5 billion, unspecified punitive
damages, costs, and fees. Two purported class
action lawsuits have been filed on behalf of
purchasers of partnership interests in the High
Grade and Enhanced Leverage U.S. feeder funds,
respectively. In each such action, the plaintiff
has asserted claims for, among other things, breach
of fiduciary duty. The class action complaints also
purport to assert derivative actions with the High
Grade and
Enhanced Leverage U.S. feeder funds as nominal
defendants. The relief being sought by these
plaintiffs is unspecified damages, costs and fees.
In addition, Bank of America and Banc of America
Securities LLC (together “BofA”) have filed a lawsuit in
United States District Court for the Southern District of New York alleging breach of contract and fraud in connection
with a May 2007 $4 billion dollar securitization,
known as a “CDO-squared,” for which BSAM served as
collateral manager. This securitization was
composed of certain collateralized debt obligation
(“CDO”) holdings that were purchased by BofA from
the High Grade Fund and the Enhanced Leverage Fund.
The Bear Stearns defendants have filed motions to
dismiss each of the four civil actions described
above. Finally, in connection with its investment
and other transactions related to the Enhanced
Leverage Fund, Barclays Bank brought an action
asserting claims for, among other things, fraud,
fraudulent concealment, breach of fiduciary duty,
and negligent misrepresentation. On February 10,2009, Barclays filed a notice of dismissal of that
action against all defendants.

In addition, one or more Bear Stearns defendants
have been named as parties in multiple FINRA
arbitrations initiated by investors in the Funds.
The relief being sought by the claimants in these
matters is compensatory damages, unspecified
punitive damages, costs and expenses.

BSAM and its affiliates have also been contacted
by, and have received requests for information and
documents from, various federal and state
regulatory and law enforcement authorities as part
of their investigations regarding the Funds,
including the SEC, the United States Attorney’s Office for the Eastern
District of New York and the Securities Division of
the Commonwealth of Massachusetts (the “Massachusetts Securities
Division”). On November 14, 2007, the Massachusetts Securities
Division filed an administrative complaint against
BSAM alleging that BSAM violated multiple
provisions of the Massachusetts Securities Act by
failing to adequately disclose and/or manage
conflicts of interest related to procedures for
related party transactions. BSAM submitted an Offer
of Settlement to resolve this matter that was
accepted by the Massachusetts Securities Division, and then
resolved through a Consent Order filed on November13, 2008.

Enron Litigation. JPMorgan Chase and certain of its
officers and directors are involved in a number of
lawsuits arising out of its banking relationships
with Enron Corp. and its subsidiaries (“Enron”).
Several actions and other proceedings against the
Firm have been resolved, including adversary
proceedings brought by Enron’s bankruptcy estate.
In addition, the Firm resolved the lead class
action litigation brought on behalf of the
purchasers of Enron securities, captioned Newby v.
Enron Corp., for approximately $2.2 billion
(pretax), which the Firm funded on October 16, 2008.

The Newby settlement does not resolve Enron-related
actions filed separately by plaintiffs who opted
out of the class action or by certain plaintiffs
who are asserting claims not covered by that
action. Some of these other
actions have been dismissed or settled separately.
The remaining Enron-related actions include three
actions against the Firm by plaintiffs who were
bank lenders or claim to be successors-in-interest
to bank lenders who participated in Enron credit
facilities co-syndicated by the Firm; individual
actions by Enron investors, creditors and
counterparties; and a third-party action brought by
a defendant in an Enron-related case seeking
apportionment of responsibility and contribution
under Texas state law against JPMorgan Chase and
other defendants. Plaintiffs in the bank lender
cases have moved for partial summary judgment, and
JPMorgan Chase has moved for summary judgment
and/or partial judgment on the pleadings. The three
bank lender cases have been transferred to the
United States District Court for the Southern
District of New York.

In March 2006, two plaintiffs filed complaints in
New York Supreme Court against JPMorgan Chase
alleging breach of contract, breach of implied duty
of good faith and fair dealing and breach of
fiduciary duty based upon the Firm’s role as
Indenture Trustee in connection with two indenture
agreements between JPMorgan Chase and Enron. The
Firm removed both actions to the United States
District Court for the Southern District of New
York. The federal court dismissed one of these
cases and remanded the other to New York State
court. JPMorgan Chase filed a motion to dismiss
plaintiffs’ amended complaint in State court on May24, 2007, which was denied. JPMorgan Chase
appealed, and on December 23, 2008, the Supreme
Court, Appellate Division for the First Department
reversed the trial court’s order, dismissing
plaintiffs’ complaint. Plaintiffs have moved for
leave to further appeal this ruling.

In a purported, consolidated class action lawsuit
by JPMorgan Chase stockholders alleging that the
Firm issued false and misleading press releases and
other public documents relating to Enron in
violation of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder, the
United States District Court for the Southern
District of New York dismissed the lawsuit in its
entirety without prejudice in March 2005.
Plaintiffs filed an amended complaint in May 2005.
The Firm moved to dismiss the amended complaint,
which the Court granted with prejudice on March 28,2007. Plaintiffs appealed the dismissal. On January21, 2009, the United States Court of Appeals for
the Second Circuit affirmed the trial court’s
dismissal of the action.

A putative class action on behalf of JPMorgan Chase
employees who participated in the Firm’s 401(k)
plan alleges claims under ERISA for alleged breaches
of fiduciary duties and negligence by JPMorgan
Chase, its directors and named officers. In August
2005, the United States District Court for the
Southern District of New York denied plaintiffs’
motion for class certification and ordered some of
plaintiffs’ claims dismissed. In September 2005,
the Firm moved for summary judgment seeking
dismissal of this ERISA lawsuit in its entirety,
and in September 2006, the Court granted summary
judgment in part, and ordered plaintiffs to show
cause as to why the remaining claims should not be
dismissed. On December 27, 2006, the Court
dismissed the case with prejudice. Plaintiffs
appealed the dismissal. On December 24, 2008, the
United States Court of Appeals for the Second
Circuit reversed the trial court’s dismissal and
remanded the case back to the District Court for
further proceedings.

IPO Allocation Litigation. Beginning in May 2001,
JPMorgan Chase and certain of its securities
subsidiaries were named, along with numerous other
firms in the securities industry, as defendants in
a large number of putative class action lawsuits
filed in the United States District Court for the
Southern District of New York alleging
improprieties in the allocation of securities in
various public offerings, including some offerings
for which a JPMorgan Chase entity served as an
underwriter. They also claim violations of
securities laws arising from alleged material
misstatements and omissions in registration
statements and prospectuses for the initial public
offerings (“IPOs”) and alleged market manipulation
with respect to aftermarket transactions in the
offered securities. The securities lawsuits allege,
among other things, misrepresentation and market
manipulation of the aftermarket trading for these
offerings by tying allocations of shares in IPOs to
undisclosed excessive commissions paid to the
underwriter defendants, including JPMorgan
Securities, and to required aftermarket purchase
transactions by customers who received allocations
of shares in the respective IPOs, as well as
allegations of misleading analyst reports. Bear,
Stearns & Co., Inc. is named as a defendant in 95
of the pending IPO securities cases. Antitrust
lawsuits based on similar allegations have been
dismissed with prejudice.

The District Court denied a motion to dismiss in
all material respects relating to the underwriter
defendants and generally granted plaintiffs’ motion
for class certification in six “focus cases.” The
U.S. Court of Appeals for the Second Circuit
reversed the District Court’s order granting class
certification, denied plaintiffs’ applications for
rehear-

ing and rehearing en banc, and remanded. On August14, 2007, plaintiffs amended their complaints in the
six “focus cases” as well as their master
allegations for all such cases to reflect new
class-related allegations. On September 27, 2007,
plaintiffs filed a new motion for class
certification in the District Court, and on
November 14, 2007, JPMorgan Securities and the
other defendants moved to dismiss the amended
complaints. Following a mediation, a settlement in
principle has been reached, subject to negotiation
of definitive documentation and court approval. It
has now been publicly reported by others that the
aggregate total of the amounts agreed to be paid by
or on behalf of all issuer and underwriter
defendants, including Lehman Brothers, Inc., which
is now in bankruptcy proceedings, totaled $610
million. JPMorgan Securities’ share of the
settlement will not
have a material adverse effect on the consolidated
financial condition of the Firm.

JPMorgan Securities is also among numerous
underwriting firms named as defendants in a number
of complaints filed commencing October 3, 2007, in
the United States District Court for the Western District
of Washington under Section 16(b) of the
Securities and Exchange Act of 1934 in connection
with the IPO of securities for 23 issuers. Bear
Stearns was named in complaints in connection with
four issuers. Motions to dismiss have been fully
briefed but have not been decided by the Court.

Interchange
Litigation. On June 22, 2005, a group of
merchants filed a putative class action complaint
in the United States District Court for the
District of Connecticut. The complaint alleged that
VISA, MasterCard, Chase Bank USA, N.A., and
JPMorgan Chase, as well as certain other banks, and
their respective bank holding companies, conspired
to set the price of credit card interchange fees in
violation of Section 1 of the Sherman Act. The
complaint further alleged tying/bundling and
exclusive dealing. Since the filing of the
Connecticut complaint, other complaints were filed
in different United States District Courts
challenging the setting of interchange, as well as
the card associations’ respective rules. All cases
have been consolidated in the Eastern District of
New York for pretrial proceedings. An amended
consolidated class action complaint was filed on
April 24, 2006, that incorporated the interchange
claims, described the alleged anticompetitive
effects of card associations’ rules and extended
claims beyond credit to debit cards. Defendants
filed a motion to dismiss all claims that predated
January 1, 2004. On January 8, 2008, the Court
granted the motion to dismiss these claims. On
January 30, 2009, a second amended consolidated class
action complaint was served. The basic theories of
the complaint remain the same. Fact discovery has
closed, and expert discovery in the case is
ongoing. The plaintiffs have filed a motion seeking
class certification, and the defendants have
opposed that motion. The Court has not yet ruled on
the class certification motion.

In addition to the consolidated class action
complaint, plaintiffs filed supplemental complaints
challenging the MasterCard and Visa IPOs. With
respect to MasterCard, plaintiffs first filed a
supplemental complaint in May 2006 alleging that
the offering violated Section 7 of the Clayton Act
and Section 1 of the Sherman Act and that the
offering was a fraudulent conveyance. Defendants
filed a motion to dis-

miss both of those claims. After the issues were
fully briefed, on November 25, 2008, the District
Court dismissed the supplemental complaint with
leave to replead. On January 30, 2009, the
plaintiffs filed and served an amended supplemental
complaint again challenging the MasterCard IPO,
making antitrust claims similar to those that were
set forth in the original supplemental complaint,
as well as the fraudulent conveyance claim. With
respect to the Visa IPO, on
January 30, 2009, the plaintiffs filed a
supplemental complaint challenging the Visa IPO on
antitrust theories parallel to those articulated in
the MasterCard IPO pleading.

Mortgage-Backed Securities Litigation. JPMorgan
Securities, J.P. Morgan Acceptance Corp I (“JPMAC”)
and 32 trusts that issued Mortgage Pass-Through
Certificates and Asset-Backed Pass-Through
Certificates, for which JPMorgan Securities served as underwriter
and JPMAC as depositor, as well as certain officers
and/or directors of JPMAC, are defendants in a
purported class action suit commenced on March 26,2008, in State court in New York. The suit was
subsequently removed by defendants to the United
States District Court for the Eastern District of
New York. Plaintiffs, two employee benefit plans,
assert claims for violations of the federal
securities laws alleging that the disclosures in
the offering materials for the certificates issued
by the 32 trusts contained material misstatements
and omissions, particularly as to mortgage
origination standards and the risk profile of the
investment. The complaint seeks unspecified damages
and rescission. Pursuant to a stipulation among the
parties, plaintiffs are to serve an amended
complaint by March 9, 2009.

A purported class action suit was commenced on
August 20, 2008, against Bear, Stearns & Co. Inc.
and certain of its subsidiaries and former
employees in New York Supreme Court on behalf of
purchasers of certificates issued in an offering of
Mortgage Loan Pass-Through Certificates. JPMorgan
Chase is also named as a defendant solely in its
alleged capacity as successor-in-interest to Bear,
Stearns & Co. Inc. Plaintiff also asserts claims
for violations of the federal securities laws,
claiming the offering materials for the
certificates allegedly contained material
misstatements and omissions with respect to, among
other things, mortgage origination standards and
the risk profile of the investment. Plaintiff seeks
recovery of unspecified compensatory damages and
rescission. The defendants have removed this action
to the District Court for the Southern District of
New York.

Two purported nationwide class actions alleging
violations of the federal securities laws in
connection with the sale of mortgage-backed
securities have also been brought against
Washington Mutual Bank and certain of its former
subsidiaries by three employee retirement plans.
The first case (the “State-Filed Action”) was filed
in the Superior Court of the State Washington,
County of King on August 4, 2008, against
Washington Mutual Bank; three former Washington
Mutual Bank subsidiaries that are now subsidiaries
of JPMorgan Chase Bank, N.A. (WaMu Asset Acceptance
Corp., WaMu Capital Corp., Washington Mutual
Mortgage Securities Corp.); and four former
Washington Mutual Bank employees (some of whom are
now JPMorgan Chase employees). The plaintiffs in
this case allege that defendants made false and
misleading statements and omissions relating to
mortgage origination and underwriting standards in
offering materials for Mortgage Pass-Through
certificates, backed by

pools of
Washington Mutual Bank-originated, first-lien, prime mortgages. Plaintiffs also allege that
defendants failed to disclose Washington Mutual
Bank’s alleged coercion of or collusion with
appraisal vendors to inflate appraisal valuations
and thus misrepresented the loan-to-value ratios
of, and the adequacy of appraisals supporting, the
loans in the pools. On January 28, 2009, the state
court issued an order substituting the FDIC as
defendant for Washington Mutual Bank. On January29, 2009, the FDIC removed this action to the
United States District Court for the Western
District of Washington. On February 5, 2009, the
FDIC moved to stay the State-Filed Action pending
completion of the FDIC’s administrative review of
plaintiff’s claims.

The second case (the “Federal-Filed Action”) filed
on January 12, 2009, is pending in the United
States District Court for the Western District of
Washington in Seattle against Washington Mutual
Bank, WaMu Asset Acceptance Corp., WaMu Capital
Corp., the same individuals named in the
State-Filed Action, and 19 securitization trusts. The
plaintiff in the Federal-Filed Action makes similar
allegations to the State-Filed Action, but does not
specifically challenge defendants’ appraisal
practices. On February 10, 2009, the Court in the
Federal-Filed Action ordered that the FDIC be
substituted as defendant for Washington Mutual
Bank. On February 12, 2009, the FDIC moved to
dismiss it from the Federal-Filed Action without
prejudice because plaintiffs failed to exhaust
administrative remedies before filing their
lawsuit. On February 19, 2009, the non-FDIC defendants moved in the
Federal-Filed Action to consolidate that action with the State-Filed
Action.

EMC
Mortgage Corporation (“EMC”), a subsidiary of
JPMorgan Chase, has been named as a defendant in an
action commenced on November 5, 2008, in the United
States District Court for the Southern District of
New York, by Ambac Assurance Corp., a mono-line
bond insurer that guaranteed payment on certain
classes of mortgage-backed securities issued by
EMC. This lawsuit involves four EMC
securitizations. Plaintiff claims the loans that
served as collateral for the four transactions had
origination defects that purportedly violate
certain representations and warranties given by EMC
to plaintiff and that EMC has breached the relevant
agreements between the parties by failing to
repurchase allegedly defective mortgage loans.
Plaintiff seeks unspecified damages and an order
compelling EMC to repurchase individual loans that
are allegedly in breach of EMC’s representations
and warranties.

In addition, the Firm has been named as a
defendant in its capacity as an underwriter for
other issuers in other litigation involving
mortgage-backed securities.

Auction-Rate Securities Investigations and
Litigation. Beginning in March 2008, several
regulatory authorities initiated investigations of
a number of industry participants, including the
Firm, concerning possible state and federal
securities law violations in connection with the
sale of auction-rate securities. The market for
many such securities had frozen and a significant
number of auctions for those securities began to
fail in
February 2008. Multiple state and federal agencies,
including the SEC, the Financial Industry
Regulatory Authority (“FINRA”), the Attorney General
of the State of New York, the State of Florida
Office of Financial Regulation, on behalf of the
North American Securities

Administrators
Association (“NASAA”), and the
Massachusetts Attorney General, have either
requested information from JPMorgan Chase or issued
subpoenas to JPMorgan Chase regarding the
activities of its affiliates with respect to
auction-rate securities.

On August 13, 2008, the Firm, on behalf of itself
and affiliates, agreed to a settlement in principle
with the New York Attorney General’s Office which
provided, among other things, that the Firm would
offer to purchase at par certain auction-rate
securities purchased from JPMorgan Securities,
Chase Investment Services Corp. and Bear, Stearns &
Co. Inc. by individual investors, charities, and
small- to medium-sized businesses with account
values of up to $10 million no later than November12, 2008. On August 14, 2008, the Firm agreed to a
substantively similar settlement in principle with
the Office of Financial Regulation for the State of
Florida and NASAA Task Force, which agreed
to recommend approval of the settlement to all
remaining states, Puerto Rico and the U.S. Virgin
Islands. The agreements in principle provide for
the payment of penalties totaling $25 million to
New York and the other states.

JPMorgan Chase is currently in the process of
negotiating final settlement documentation with
the New York Attorney General’s Office and the
Office of Financial Regulation for the State of
Florida. JPMorgan Chase has cooperated, and will
continue to cooperate, with the ongoing SEC’s
investigation.

On October 17, 2008, following an investigation by
FINRA into auction-rate securities practices of
WaMu Investments Inc., a former Washington Mutual
Bank subsidiary acquired by the Firm in the
Washington Mutual transaction. WaMu Investments,
Inc. resolved the matter by submitting a Letter of
Acceptance, Waiver and Consent to FINRA. Without
admitting or denying the findings, WaMu
Investments, Inc. consented to findings by FINRA
that it violated certain NASD Rules relating to
communications with the public and supervisory
procedures and, among other things, agreed to offer
to purchase at par auction-rate securities
purchased by certain WaMu Investments, Inc.
customers and to pay a fine of $250,000.

The Firm is the subject of two putative securities
class actions in the United States District Court
for the Southern District of New York and a number
of individual arbitrations and lawsuits relating to
the Firm’s sales of auction-rate securities. Each
complaint alleges that JPMorgan Chase marketed
auction-rate securities as safe, liquid, short-term
investments although it knew that auction-rate
securities were long-dated debt instruments. The
complaints also allege that JPMorgan Chase and
other broker-dealers artificially supported the
auction-rate securities market and that JPMorgan Chase knew
that the market would become illiquid if the firms
stopped supporting the auctions but did not
disclose this fact to investors. Each of the named
plaintiffs in these actions accepted JPMorgan
Chase’s buy-back offer as part of its settlement
with the regulatory agencies and no longer owns any
auction-rate securities. Judge Berman of the United
States District Court for the Southern District of
New York consolidated the two putative securities
class actions and appointed lead plaintiffs and
lead counsel involving the sale of auction-rate
securities. One of the groups of plaintiffs
previously seeking lead

plaintiff status filed a motion for
reconsideration of the Court’s order. The motion
for reconsideration has been fully briefed and is
pending before the Court.

Additionally, the Firm is the subject of two
putative antitrust class actions in the United
States District Court for the Southern District of
New York, which actions allege that the Firm, in
collusion with numerous other financial institution
defendants, entered into an unlawful conspiracy in
violation of Section 1 of the Sherman Act.
Specifically, the complaints allege that defendants
acted collusively to maintain and stabilize the
auction-rate securities market and similarly acted
collusively in withdrawing their support for the
auction-rate securities market in February 2008.
JPMorgan Chase and the other defendants filed a
joint motion to dismiss both actions. Plaintiffs’
opposition to the motion is due on March 19, 2009.

In addition to the various cases, proceedings and
investigations discussed above, JPMorgan Chase and
its subsidiaries are named as defendants or
otherwise involved in a number of other legal
actions and governmental proceedings arising in
connection with their businesses. Additional
actions, investigations or proceedings may be
initiated from time to time in the future. In view
of the inherent difficulty

of predicting the outcome of legal matters,
particularly where the claimants seek very large or
indeterminate damages, or where the cases present
novel legal theories, involve a large number of
parties or are in early stages of discovery, the
Firm cannot state with confidence what the eventual
outcome of these pending matters will be, what the
timing of the ultimate resolution of these matters
will be or what the eventual loss, fines, penalties
or impact related to each pending matter may be.
JPMorgan Chase believes, based upon its current
knowledge, after consultation with counsel and
after taking into account its current litigation
reserves, that the outcome of the legal actions,
proceedings and investigations currently pending
against it should not have a material adverse
effect on the Firm’s consolidated financial
condition. However, in light of the uncertainties
involved in such proceedings, actions and
investigations, there is no assurance that the
ultimate resolution of these matters will not
significantly exceed the reserves currently accrued
by the Firm; as a result, the outcome of a
particular matter may be material to JPMorgan
Chase’s operating results for a particular period,
depending on, among other factors, the size of the
loss or liability imposed and the level of JPMorgan
Chase’s income for that period.

Chairman of the Board since December 31, 2006, and President and Chief
Executive Officer since December 31, 2005. He had been President and Chief
Operating Officer from July 1, 2004, until December 31, 2005. Prior to the
merger between JPMorgan Chase & Co. and Bank One Corporation (the
“Merger”), he had been Chairman and Chief Executive Officer of Bank One
Corporation.

Frank J. Bisignano

49

Chief Administrative Officer since December 2005. Prior to joining JPMorgan
Chase, he had been Chief Executive Officer of Citigroup Inc.’s Global
Transaction Services.

Steven D. Black

56

Co-Chief Executive Officer of the Investment Bank since March 2004, prior to
which he had been Deputy Head of the Investment Bank.

Chief Financial Officer since September 2004, prior to which he had been Head
of Middle Market Banking. Prior to the Merger, he had been Chief
Administrative Officer of Commercial Banking and Chief Operating Officer of
Middle Market Banking at Bank One Corporation.

Stephen M. Cutler

47

General Counsel since February 2007. Prior to joining JPMorgan Chase, he was
a partner and co-chair of the Securities Department at the law firm of
WilmerHale since October 2005. Prior to joining WilmerHale, he had been
Director of the Division of Enforcement at the U.S. Securities and Exchange
Commission since October 2001.

William M. Daley

60

Head of Corporate Responsibility since June 2007 and Chairman of the
Midwest Region since May 2004. Prior to joining JPMorgan Chase, he had been
President of SBC Communications.

Chief Investment Officer since February 2005, prior to which she was Head of
Global Treasury.

Samuel Todd Maclin

52

Head of Commercial Banking since July 2004, prior to which he had been
Chairman and CEO of the Texas Region and Head of Middle Market Banking.

Jay Mandelbaum

46

Head of Strategy and Business Development. Prior to the Merger, he had been
Head of Strategy and Business Development since September 2002 at Bank
One Corporation.

Heidi Miller

55

Chief Executive Officer of Treasury & Securities Services. Prior to the Merger, she
had been Chief Financial Officer at Bank One Corporation.

Charles W. Scharf

43

Chief Executive Officer of Retail Financial Services. Prior to the Merger, he had
been Head of Retail Banking at Bank One Corporation.

Gordon A. Smith

50

Chief Executive Officer of Card Services since June 2007. Prior to joining
JPMorgan Chase, he was with American Express Company for more than 25
years. From August 2005 until June 2007, he was president of American
Express’ global commercial card business. Prior to that, he was president of the
consumer card services group and was responsible for all consumer card products in the U.S.

James E. Staley

52

Chief Executive Officer of Asset Management.

William T. Winters

47

Co-Chief Executive Officer of the Investment Bank since March 2004, prior to
which he had been Deputy Head of the Investment Bank and Head of Credit &
Rate Markets.

Barry L. Zubrow

55

Chief Risk Officer since November 2007. Prior to joining JPMorgan Chase, he
was a private investor and has been Chairman of the New Jersey Schools
Development Authority since March 2006; prior to November 2003 he held a
variety of positions at The Goldman Sachs Group, including Chief Administrative
Officer from 1999.

Unless otherwise noted, during the five fiscal years ended December 31, 2008, all of JPMorgan
Chase’s above-named executive officers have continuously held senior-level positions with JPMorgan
Chase or its predecessor institution, Bank One Corporation prior to
the Merger. There are no family relationships among
the foregoing executive officers.

The outstanding shares of JPMorgan Chase common
stock are listed and traded on the New York Stock
Exchange, the London Stock Exchange Limited and the
Tokyo Stock Exchange. For the quarterly high and
low prices of JPMorgan Chase’s common stock on the
New York Stock Exchange for the last two years, see
the section entitled “Supplementary information –
Selected quarterly financial data (unaudited)” on
page 217. For a comparison of the cumulative total
return for JPMorgan Chase common stock with the
comparable total return of the S&P 500 Index and
the S&P Financial Index over the five-year period
ended December 31, 2008, see “Five-year stock
performance,” on page 27.

On
February 23, 2009, the Board of Directors reduced the Firm's
quarterly common stock dividend from $0.38 to $0.05 per share,
effective for the dividend payable April 30, 2009 to
shareholders of record on April 6, 2009.
JPMorgan Chase declared
quarterly cash dividends on its common stock in the
amount of $0.38 for each quarter of 2008 and the
second, third and fourth quarters of 2007, and $0.34 per share for the first quarter of 2007 and
for each quarter of 2006. The common dividend
payout ratio, based upon reported net income, was
114% for 2008, and 34% for both 2007 and 2006. For
a discussion

of restrictions on dividend payments,
see Note 24 on pages 193–194 and for additional information
regarding the reduction of the dividend, see page 32.

At January 31, 2009,
there were 233,908 holders of record of JPMorgan
Chase common stock.

On April 17, 2007, the Board of Directors authorized
the repurchase of up to $10.0 billion of the Firm’s
common shares, which supercedes an $8.0 billion
repurchase program approved in 2006. The $10.0
billion authorization includes shares to be
repurchased to offset issuances under the Firm’s
employee stock-based plans. The actual number of
shares repurchased is subject to various factors,
including market conditions; legal considerations
affecting the amount and timing of repurchase
activity; the Firm’s capital position (taking into
account goodwill and intangibles); internal capital
generation; and alternative potential investment
opportunities. The repurchase program does not
include specific price targets or timetables, may
be executed through open market purchases or
privately negoti-

ated transactions, or utilizing a written
trading plan under Rule 10b5-1 of the Securities
Exchange Act of 1934, and may be suspended at any
time. A Rule 10b5-1 repurchase plan allows the Firm
to repurchase shares during periods when it would
not otherwise be repurchasing common stock, for
example during internal trading “black-out periods.” All purchases under a Rule 10b5-1 plan must be
made according to a predefined plan that is
established when the Firm is not aware of material
nonpublic information.

In order to maintain its capital objectives, the
Firm did not repurchase any shares during the
fourth quarter and full year of 2008, under the
current $10.0 billion stock repurchase program. As
of December 31, 2008, $6.2 billion of authorized
repurchase capacity remained under the current
stock repurchase program. For a discussion of
restrictions on stock repurchases, see Capital
Purchase Program on page 72 and Note 24 on pages
193–194.

Stock repurchases under the stock-based incentive plans

Participants in the Firm’s stock-based incentive
plans may have shares withheld to cover income
taxes. Shares withheld to pay income taxes are
repurchased pursuant to the terms of the applicable
plan and not under the Firm’s share repurchase
program. Shares repurchased after October 28, 2008,
were repurchased in accordance with an exemption
from the Capital Purchase Program’s stock
repurchase restrictions. Shares repurchased
pursuant to these plans during 2008 were as
follows:

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of
financial condition and results of operations,
entitled “Management’s discussion and analysis,” appears on pages 27 through 114. Such information
should be read in conjunction with the
consolidated financial statements and notes
thereto, which appear on pages 118 through 216.

ITEM 7A: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

For information related to market risk,
see the “Market Risk Management” section on
pages 99 through 104.

ITEM 8: FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

The consolidated financial statements, together
with the notes thereto and the report of
PricewaterhouseCoopers LLP dated February 27, 2009,
thereon, appear on pages 117 through 216.

Supplementary financial data for each full quarter
within the two years ended December 31, 2008, are
included on page 217 in the table entitled
“Supplementary information – Selected quarterly
financial data (unaudited).” Also included is a
“Glossary of terms’’ on pages 219–222.

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A: CONTROLS AND PROCEDURES

As of the end of the period covered by this
report, an evaluation was carried out under the
supervision and with the participation of the
Firm’s management, including its Chairman and Chief
Executive Officer and its Chief Financial Officer,
of the effectiveness of its disclosure controls and
procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934). Based upon that
evaluation, the Chairman and Chief Executive
Officer and the Chief Financial Officer concluded
that these disclosure controls and procedures were
effective. See Exhibits 31.1 and 31.2 for the
Certification statements issued by the Chairman and
Chief Executive Officer and Chief Financial
Officer.

The Firm is committed to maintaining high standards
of internal control over financial reporting.
Nevertheless, because of its inherent limitations,
internal control over financial reporting may not
prevent or detect misstatements. In addition, in a
firm as large and complex as JPMorgan Chase, lapses
or deficiencies in internal controls may occur from
time to time, and there can be no assurance that
any such deficiencies will not result in
significant deficiencies – or even material
weaknesses – in internal controls in the
future. See page 116 for “Management’s report on
internal control over financial reporting.” There
was no change in the Firm’s internal control over
financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934) that
occurred during the fourth quarter of 2008 that has
materially affected, or is reasonably likely to
materially affect, the Firm’s internal control over
financial reporting.

For security ownership of certain beneficial
owners and management, see Item 13 below.

The following table details the total number of shares available for issuance under JPMorgan
Chase’s employee stock-based incentive plans (including shares available for issuance to
nonemployee directors). The Firm is not authorized to grant stock-based incentive awards to
nonemployees other than to nonemployee directors.

Information to be provided in Items 10, 11, 12, 13
and 14 of Form 10-K and not otherwise included
herein is incorporated by reference to the Firm’s
definitive proxy statement for its 2008 Annual
Meeting of Stockholders to be held on May 19, 2009,
which will be filed with the SEC within 120 days of
the end of the Firm’s fiscal year ended December31, 2008.

ITEM 14: PRINCIPAL ACCOUNTING FEES
SERVICES

See Item 13 above.

Part IV

ITEM 15: EXHIBITS, FINANCIAL STATEMENT
SCHEDULES

Exhibits, financial statement schedules

1.

Financial statements

The Consolidated financial statements, the Notes thereto and the report thereon listed in Item 8
are set forth commencing on page 18.

Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series I
(incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co.
(File No. 1-5805) filed April 24, 2008).

3.3

Certificate of Designations of 6.15% Cumulative Preferred Stock, Series E (incorporated by
reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No.
1-5805) filed July 16, 2008).

Certificate of Designations of 5.72% Cumulative Preferred Stock, Series F (incorporated by
reference to Exhibit 3.2 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No.
1-5805) filed July 16, 2008).

3.5

Certificate of Designations of 5.49% Cumulative Preferred Stock, Series G (incorporated by
reference to Exhibit 3.3 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No.
1-5805) filed July 16, 2008).

3.6

Certificate of Designations of 8.625% Non-Cumulative Preferred Stock, Series J (incorporated
by reference to Exhibit 3.1 to the Current Report on Form 8-K/A of JPMorgan Chase & Co. (File No.
1-5805) filed September 17, 2008).

3.7

Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series K (incorporated
by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No.
1-5805) filed October 31, 2008).

Indenture, dated as of December 1, 1989, between Chemical Banking Corporation (now known as
JPMorgan Chase & Co.) and The Chase Manhattan Bank (National Association) (succeeded by Deutsche
Bank Trust Company Americas), as Trustee.

Fifth Supplemental Indenture, dated as of December 22, 2008, between JPMorgan Chase & Co.
and Deutsche Bank Trust Company Americas, as Trustee, to the
Indenture, dated as of December 1, 1989.

4.2(a)

Indenture, dated as of April 1, 1987, as amended and restated as of December 15, 1992,
between Chemical Banking Corporation (now known as JPMorgan Chase & Co.) and Morgan Guaranty Trust
Company of New York (succeeded by U.S. Bank Trust National Association), as Trustee (incorporated
by reference to Exhibit 4.3(a) to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2005).

Junior Subordinated Indenture, dated as of December 1, 1996, between The Chase Manhattan
Corporation (now known as JPMorgan Chase & Co.) and The Bank of New York (succeeded by The Bank of
New York Mellon), as Trustee.

Other instruments defining the rights of holders of long-term debt securities of JPMorgan
Chase & Co. and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of
Regulation S-K. JPMorgan Chase & Co. agrees to furnish copies of these instruments to the SEC upon
request.

Summary of Bank One Corporation Director Deferred Compensation Plan (incorporated by
reference to Exhibit 10.19 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2005). *

Form of JPMorgan Chase & Co. Long-Term Incentive Plan
Award Agreement of January 2005 stock appreciation rights
(incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K
of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005). *

10.17

Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of October 2005 stock
appreciation rights (incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K
of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005). *

Letter Agreement, including the Securities Purchase Agreement-Standard Terms incorporated
therein, dated October 26, 2008, between JPMorgan Chase & Co. and the United States Department of
the Treasury (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K of
JPMorgan Chase & Co. (File No. 1-5805) filed October 31, 2008).

Results for 2008 and 2004 included an accounting conformity loan loss reserve provision
related to the acquisition of Washington Mutual Bank’s banking operations and the merger with Bank
One Corporation, respectively.

(b)

The income tax benefit in 2008 is the result of the release of previously established deferred
tax liabilities on non-U.S. earnings and business tax credits.

(c)

On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust
businesses for the consumer, business banking and middle-market banking businesses of The Bank of
New York Company Inc. The results of operations of these corporate trust businesses are being
reported as discontinued operations for each of the periods presented.

(d)

Effective September 25, 2008, JPMorgan Chase acquired the banking operations of Washington
Mutual Bank for $1.9 billion. The fair value of the net assets acquired exceeded the purchase price
which resulted in negative goodwill. In accordance with SFAS 141, nonfinancial assets that are not
held-for-sale were written down against that negative goodwill. The negative goodwill that remained
after writing down nonfinancial assets was recognized as an extraordinary gain in 2008.

(e)

JPMorgan Chase’s common stock is listed and traded on the New York Stock Exchange, the London
Stock Exchange Limited and the Tokyo Stock Exchange. The high, low and closing prices of JPMorgan
Chase’s common stock are from The New York Stock Exchange Composite Transaction Tape.

(f)

On September 25, 2008, JPMorgan Chase acquired the banking
operations of Washington Mutual Bank. On May 30, 2008, the Bear
Stearns merger was consummated. Each of these transactions was
accounted for as a purchase and their respective results of
operations are included in the Firm’s results from each
respective transaction date. For additional information on these
transactions, see Note 2 on pages 123-128 of this Annual Report.

(g)

On July 1, 2004, Bank One Corporation merged with and
into JPMorgan Chase. Accordingly, 2004
results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase
results.

The following table and graph compare the
five-year cumulative total return for JPMorgan
Chase & Co. (“JPMorgan Chase” or the “Firm”) common
stock with the cumulative return of the S&P 500
Stock Index and the S&P Financial Index. The S&P
500 Index is a commonly referenced U.S. equity
benchmark consisting of leading companies from
different economic sectors. The S&P Financial Index
is an index of 81 financial companies, all of which
are within the S&P 500. The Firm is a component of
both industry indices.

The following table and graph assumes simultaneous
investments of $100 on December 31, 2003, in
JPMorgan Chase common stock and in each of the
above S&P indices. The comparison assumes that all
dividends are reinvested.

December 31,

(in dollars)

2003

2004

2005

2006

2007

2008

JPMorgan Chase

$

100.00

$

109.92

$

116.02

$

145.36

$

134.91

$

100.54

S&P Financial Index

100.00

110.89

118.07

140.73

114.51

51.17

S&P500

100.00

110.88

116.33

134.70

142.10

89.53

This section of the JPMorgan Chase’s Annual
Report for the year ended December 31, 2008
(“Annual Report”) provides management’s discussion
and analysis of the financial condition
and results of operations (“MD&A”) of JPMorgan Chase. See
the Glossary of terms on pages 218–221 for
definitions of terms used throughout this Annual
Report. The MD&A included in this Annual Report
contains statements that are forward-looking within
the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are
based upon the current beliefs and expectations of
JPMorgan

Chase’s management and are subject to significant
risks and uncertainties. These risks and
uncertainties could cause JPMorgan Chase’s results
to differ materially from those set forth in such
forward-looking statements. Certain of such risks
and uncertainties are described herein (see
Forward-looking statements on page 115 of this
Annual Report) and in the JPMorgan Chase Annual
Report on Form 10-K for the year ended December 31,2008 (“2008 Form 10-K”), in Part I, Item 1A: Risk
factors, to which reference is hereby made.

INTRODUCTION

JPMorgan Chase & Co., a financial holding company
incorporated under Delaware law in 1968, is a
leading global financial services firm and one of
the largest banking institutions in the United
States of America (“U.S.”), with $2.2 trillion in
assets, $166.9 billion in stockholders’ equity and
operations in more than 60 countries as of December31, 2008. The Firm is a leader in investment
banking, financial services for consumers and
businesses, financial transaction processing and
asset management. Under the J.P. Morgan and Chase
brands, the Firm serves millions of customers in
the U.S. and many of the world’s most prominent
corporate, institutional and government clients.

A description
of the Firm’s business segments, and the products and
services they provide to their respective client
bases, follows.

Investment Bank
J.P. Morgan is one of the world’s leading
investment banks, with deep client relationships
and broad product capabilities. The Investment
Bank’s clients are corporations, financial
institutions, governments and
institutional investors. The Firm offers a full
range of investment banking products and services
in all major capital markets, including advising on
corporate strategy and structure, capital raising
in equity and debt markets, sophisticated risk
management, market-making in cash securities and
derivative instruments, prime brokerage and research. The Investment Bank (“IB”)
also selectively commits the Firm’s own capital to
principal investing and trading activities.

Retail Financial Services
Retail Financial Services (“RFS”), which includes
the Retail Banking and Consumer Lending reporting
segments, serves consumers and businesses through
personal service at bank branches and through ATMs,
online banking and telephone banking as well as
through auto dealerships and school financial aid
offices. Customers can use more than 5,400 bank
branches (third-largest nationally) and 14,500 ATMs
(second-largest nationally) as well as online and
mobile banking around the clock. More than 21,400
branch salespeople assist

customers with checking and savings accounts,
mortgages, home equity and business loans, and
investments across the 23-state footprint from New
York and Florida to California. Consumers also can
obtain loans through more than 16,000 auto
dealerships and 4,800 schools and universities
nationwide.

Card Services
Chase Card Services (“CS”) is one of the nation’s largest
credit card issuers with more than 168 million
cards in circulation and more than $190 billion in
managed loans. Customers used Chase cards to meet
more than $368 billion worth of their spending
needs in 2008. Chase has a market leadership
position in building loyalty and rewards programs
with many of the world’s most respected brands and
through its proprietary products, which include
the Chase Freedom program.

Through its merchant acquiring business, Chase
Paymentech Solutions, Chase is one of
the leading processors of MasterCard and Visa
payments.

This overview of management’s discussion and
analysis highlights selected information and may
not contain all of the information that is
important to readers of this Annual Report. For a
complete description of events, trends and
uncertainties, as well as the capital, liquidity,
credit and market risks, and the critical
accounting estimates affecting the Firm and its
various lines of business, this Annual Report
should be read in its entirety.

Financial performance of JPMorgan Chase

Year ended December 31,

(in millions, except per share and ratio data)

2008

(c)

2007

Change

Selected income statement data

Total net revenue

$

67,252

$

71,372

(6

)%

Provision for credit losses(a)

20,979

6,864

206

Total noninterest expense

43,500

41,703

4

Income before extraordinary gain

3,699

15,365

(76

)

Extraordinary gain(b)

1,906

—

NM

Net income

5,605

15,365

(64

)

Diluted earnings per share

Income before extraordinary gain

$

0.84

$

4.38

(81

)

Net income

1.37

4.38

(69

)

Return on common equity

Income before extraordinary gain

2

%

13

%

Net income

4

%

13

%

(a)

Includes an accounting conformity provision
for credit losses of $1.5 billion related to the
acquisition of Washington Mutual’s banking
operations in 2008.

(b)

JPMorgan Chase acquired the banking operations of
Washington Mutual Bank from the Federal Deposit
Insurance Corporation (“FDIC”) for $1.9 billion. The
fair value of the net assets acquired from the FDIC
exceeded the purchase price which resulted in
negative goodwill. In accordance with SFAS 141,
nonfinancial assets that are not held-for-sale were
written down against that negative goodwill. The
negative goodwill that remained after writing down
nonfinancial assets was recognized as an
extraordinary gain in 2008.
The allocation of the purchase price to the net
assets acquired (based on their respective fair
values at September 25, 2008) and the resulting
negative goodwill may be modified through September25, 2009, as more information is obtained about the
fair value of assets acquired and liabilities
assumed.

(c)

On September 25, 2008, JPMorgan Chase acquired the
banking operations of Washington Mutual Bank. On May 30, 2008,
the Bear Stearns merger was consummated. Each of these transactions
was accounted for as a purchase and their respective results of
operations are included in the Firm’s results from each
respective transaction date. For additional information on these
transactions, see Note 2 on pages 123-128 of this Annual Report.

Business overview
JPMorgan Chase reported 2008 net income of $5.6
billion, or $1.37 per share, and total net revenue
of $67.3 billion, compared with record net income
of $15.4 billion, or $4.38 per share, and record
total net revenue of $71.4 billion, for 2007. Return
on common equity was 4% in 2008, compared with 13%
in 2007. Results in 2008
include the acquisition of The Bear Stearns Companies Inc. (“Bear
Stearns”) on May 30,2008, and the acquisition of the banking operations of Washington Mutual
Bank (“Washington Mutual”) on September 25, 2008.

The decline in net income for the year was the
result of a significantly higher provision for
credit losses, reflecting the addition of $13.7
billion to the Firm’s allowance for credit losses in
2008; a decline in total net revenue driven by over
$10 billion of markdowns on mortgage-related
positions and leveraged lending exposures in the
Investment Bank; and an increase in total
noninterest expense due

to the impact of the Washington Mutual
transaction and the Bear Stearns merger.

The business environment for financial services
firms was extremely challenging in 2008. The global
economy slowed, with many countries, including the
U.S., slipping into recession. Financial conditions
worsened throughout the year amid a number of
unprecedented developments that undermined the
economic outlook and eroded confidence in global
financial markets. JPMorgan Chase acquired Bear
Stearns through a merger consummated
in May and acquired the banking operations of
Washington Mutual from the Federal Deposit
Insurance Corporation (“FDIC”) in September. The
U.S. federal government placed the Federal Home
Loan Mortgage Corporation (“Freddie Mac”) and the
Federal National Mortgage Association (“Fannie
Mae”) under its control. Lehman Brothers Holdings
Inc. declared bankruptcy. The Bank of America
Corporation acquired Merrill Lynch & Co., Inc. and
Wells Fargo & Company acquired Wachovia
Corporation. The government provided a loan to
American International Group, Inc. (“AIG”) in
exchange for an equity interest in AIG to prevent
the insurer’s failure. Morgan Stanley, The Goldman
Sachs Group, Inc., GMAC, American Express, Discover
Financial Services and CIT Group received approval
from the Board of Governors of the Federal Reserve
System (the “Federal Reserve”) to become federal
bank holding companies. In other industries,
the U.S. government provided temporary loans to General
Motors Corporation and Chrysler LLC.

These events accompanied severe strains in term
funding markets, reflecting heightened concerns
about counterparty risk. As a result, LIBOR rates
rose significantly in the fall, despite a round of
coordinated rate cuts by a number of central banks.
By year-end, LIBOR rates eased in response to
proposals to insure deposits and selected debt of
financial institutions. The turmoil in financial
markets during 2008 led to tighter credit
conditions and diminished liquidity, causing
consumers and businesses around the world to become
more cautious and curtail spending and investment
activity. As a result, the U.S. economy contracted
sharply, 2.8 million jobs were lost in 2008, and
the U.S. unemployment rate rose significantly, to
7.2% by year-end.

The continued economic and financial disruption led
the Federal Reserve to reduce its target overnight
interest rates to near zero in the fourth quarter
of 2008, capping off a year of near-continuous rate
reductions. In addition, the U.S. Department of the
Treasury (the “U.S. Treasury”), the Federal Reserve
and the FDIC, working in cooperation with foreign
governments and other central banks, including the
Bank of England, the European Central Bank and the
Swiss National Bank, began, in the fourth quarter
of 2008, to take a variety of extraordinary
measures designed to restore confidence in the
financial markets and strengthen financial
institutions, including capital injections,
guarantees of bank liabilities and the acquisition
of illiquid assets from banks. In particular, on
October 3, 2008, the Emergency Economic
Stabilization Act of 2008 (the “EESA”) was signed
into law. Pursuant to the EESA, the U.S. Treasury
has the authority to take a range of

actions to stabilize and provide liquidity to
the U.S. financial markets, including the purchase
by the U.S. Treasury of certain troubled assets
from financial institutions (the “Troubled Asset
Relief Program”) and the direct purchase by the
U.S. Treasury of equity of financial institutions
(the “Capital Purchase Program”).

The efforts to restore confidence in the financial
markets and promote economic growth continue in
2009, with initiatives including a fiscal stimulus
bill, the American Reinvestment and Recovery Act of
2009, which was signed into law by President Barack
Obama on February 17, 2009. Also in February,
the U.S. Treasury outlined a
plan to restore stability to the
financial system and President Obama proposed a
plan to help distressed homeowners. The Federal Reserve, working
with other government and regulatory agencies, has
also implemented a number of new programs to
promote the proper functioning of the credit
markets and reintroduce liquidity to the financial
system. Such
actions taken by U.S. regulatory agencies include
the introduction of programs to restore liquidity
to money market mutual funds, the commercial paper
market, and other fixed-income securities markets.
In addition, the FDIC issued a temporary liquidity guarantee
program (the “TLG Program”) for the senior debt of all FDIC-insured
institutions, as well as deposits in
noninterest-bearing transaction deposit accounts.

Despite the difficult operating environment and
overall drop in earnings, JPMorgan Chase maintained
a strong balance sheet and produced underlying
growth in many business areas. The Tier 1 capital
ratio was 10.9% at year-end; Treasury & Securities
Services and
Commercial Banking each reported record revenue and
net income for the second straight year; the
consumer businesses opened millions of new checking
and credit card accounts; Asset Management
experienced record net inflows in assets under
management; and the Investment Bank gained market
share in all major fee categories. The diversified
nature of the Firm’s businesses and its strong
capital position enabled it to weather the
recessionary environment during 2008.

JPMorgan Chase has taken a leadership role in
helping to stabilize the financial markets. It
assumed the risk and expended the necessary
resources to acquire Bear Stearns and the banking
operations of Washington Mutual. In October 2008,
the Firm agreed to accept a $25 billion capital
investment by the U.S. Treasury under the Capital Purchase Program.
JPMorgan Chase has continued to lend to clients in a safe and sound
manner and to provide liquidity to multiple
financial markets. The Firm has implemented
programs that have prevented more than 300,000
foreclosures, with plans to help more than 400,000
more families keep their homes through Chase-owned
mortgage modifications over the next two years. The
Firm has expanded this effort to include over $1.1
trillion of investor-owned mortgages.

The discussion that follows highlights the
performance of each business segment compared with
the prior year, and discusses results on a managed
basis unless otherwise noted. For more information
about managed basis, see Explanation and
reconciliation of the Firm’s use of non-GAAP
financial measures on pages 38–39 of this Annual
Report.

Investment Bank reported a net loss for the year,
compared with net income in 2007. The significant
decline in results reflected lower total net
revenue, a higher provision for credit losses and
higher total noninterest expense. Markdowns of over
$10 billion on mortgage-related positions and
leveraged lending funded and unfunded commitments
drove fixed income trading revenue lower;
investment banking fees and equity trading revenue
declined as well. These decreases were offset by
record performance in rates and currencies, credit
trading, commodities and emerging markets, as well
as strong equity client revenue, and gains from the
widening of the Firm’s credit spread on certain
structured liabilities and derivatives. The
provision for credit losses rose from the 2007
level, predominantly reflecting a higher allowance
for credit losses, driven by a weakening credit
environment, as well as the effect of the transfer
of $4.9 billion of funded and unfunded leveraged
lending commitments to retained loans from
held-for-sale in the first quarter of 2008. The
increase in total noninterest expense was largely
driven by additional expense relating to the Bear
Stearns merger, offset partially by lower
performance-based compensation expense. In
addition, IB benefited from a reduction in deferred
tax liabilities on overseas earnings.

Retail Financial Services net income declined,
reflecting a significant increase in the provision
for credit losses, predominantly offset by positive
mortgage servicing rights (“MSR”) risk management
results and the positive impact of the Washington
Mutual transaction. Additional drivers of revenue
growth included wider loan and deposit spreads and
higher loan and deposit balances. The provision for
credit losses increased as housing price declines
have continued to result in significant increases
in estimated losses, particularly for high
loan-to-value home equity and mortgage loans. The
provision was also affected by an increase in
estimated losses for the auto, student and business
banking loan portfolios. Total noninterest expense
rose from the 2007 level, reflecting the impact of
the Washington Mutual transaction, higher mortgage
reinsurance losses, increased mortgage servicing
expense and investments in the retail distribution
network.

Card Services net income declined, driven by a
higher provision for credit losses partially offset
by higher managed total net revenue. The growth in
managed total net revenue was driven by the impact
of the Washington Mutual transaction, higher
average managed loan balances, wider loan spreads
and increased interchange income, off-set
predominantly by increased rewards expense and
higher volume-driven payments to partners, as well
as the effect of higher revenue reversals
associated with higher charge-offs. The managed
provision for credit losses increased from the
prior year due to an increase in the allowance for
loan losses and a higher level of charge-offs.
Total noninterest expense rose from last year,
largely due to the impact of the Washington Mutual
transaction.

Commercial Banking net income increased, surpassing
the record level posted in 2007. The results were
driven by record total net revenue, partially
offset by an increase in the provision for credit
losses. The increase in revenue was driven by
double-digit growth in liability and loan balances,
the impact of the Washington Mutual transaction,
higher deposit and lending-related fees, and
increases in other fee

income. These were partially offset by spread
compression in the liability and loan portfolios.
The increase in the provision for credit losses
reflected a weakening credit environment and growth
in loan balances. Total noninterest expense
decreased from the prior year, due to lower
performance-based incentive compensation and
volume-based charges from service providers,
predominantly offset by the impact of the
Washington Mutual transaction.

Treasury & Securities Services net income increased
over the record level set in 2007, driven by record
total net revenue, partially offset by higher
noninterest expense. Worldwide Securities Services
posted record net revenue, driven by wider spreads
in securities lending, foreign exchange and
liability products, increased
product usage by new and existing clients, and
higher liability balances. These benefits were
partially offset by market depreciation. Treasury
Services posted record net revenue, reflecting
higher liability balances and volume growth in
electronic funds transfer products and trade loans.
Total noninterest expense increased, reflecting
higher expense related to business and volume
growth, as well as continued investment in new
product platforms.

Asset Management net income decreased, driven by
lower total net revenue, offset partially by lower
total noninterest expense. The decline in revenue
was due to lower performance fees and the effect of
lower markets, including the impact of lower market
valuations of seed capital investments. Partially
offsetting these revenue declines were higher
deposit and loan balances, the benefit of the Bear
Stearns merger, increased revenue from net asset
inflows and wider deposit spreads. The provision
for credit losses rose from the prior year,
reflecting an increase in loan balances, higher net
charge-offs and a weakening credit environment.
Total noninterest expense declined compared with
2007, driven by lower performance-based
compensation, largely offset by the effect of the
Bear Stearns merger and higher compensation expense
resulting from increased average headcount.

Corporate/Private Equity net income declined from
the 2007 level and included an extraordinary gain
related to the Washington Mutual transaction and a
conforming loan loss provision. Excluding these
items, the decrease in net income from the prior
year was driven by private equity losses in 2008,
compared with gains in 2007, losses on preferred
securities of Fannie Mae and Freddie Mac, and a
charge related to the offer to repurchase
auction-rate securities. These declines were
partially offset by the proceeds from the sale of
Visa shares in its initial public offering and a
gain on the dissolution of the Chase Paymentech
Solutions joint venture and the gain from the sale
of MasterCard shares. The decrease in total
noninterest expense reflected a reduction of credit
card-related litigation expense, partially offset
by higher merger costs.

The Firm’s managed provision for credit losses was
$24.6 billion for 2008, compared with $9.2 billion
for 2007. The total consumer-managed provision for
credit losses was $21.3 billion, compared with $8.3
billion in the prior year, reflecting increases in
the allowance for credit losses related to home
equity, mortgage and credit card loans, as well as
higher net charge-offs. Consumer-managed net
charge-offs were $13.0 billion, compared with $6.8
billion in the prior year,

resulting in managed net charge-off rates of 3.06%
and 1.97%, respectively. The wholesale provision
for credit losses was $3.3 billion, compared with
$934 million in the prior year, due to an increase
in the allowance for credit losses reflecting the
effect of a weakening credit environment and loan
growth. Wholesale net charge-offs were $402
million, compared with net charge-offs of $72
million in the prior year, resulting in net
charge-off rates
of 0.18% and 0.04%, respectively. The Firm had
total nonperforming assets of $12.7 billion at
December 31, 2008, up from the prior-year level of
$3.9 billion.

Total stockholders’ equity at December 31, 2008,
was $166.9 billion, and the Tier 1 capital ratio
was 10.9%. During 2008, the Firm raised $11.5
billion of common equity and $32.8 billion of
preferred equity, including a warrant issued to the
U.S. Treasury.

2009 Business outlookThe following forward-looking statements are
based upon the current beliefs and expectations of
JPMorgan Chase’s management and are subject to
significant risks and uncertainties. These risks
and uncertainties could cause JPMorgan Chase’s
actual results to differ materially from those set
forth in such forward-looking statements.

JPMorgan
Chase’s outlook for 2009 should be viewed against the backdrop
of the global and U.S. economies, financial markets activity,
the geopolitical environment, the competitive environment and client
activity levels. Each of these linked factors will affect the
performance of the Firm and its lines of business. In addition, as a
result of recent market conditions and events, Congress and
regulators have increased their focus on the regulation of financial
institutions. The Firm’s current expectations are for the global
and U.S. economic environments to weaken further and potentially
faster, capital markets to remain under stress, for there to be a
continued decline in U.S. housing prices, and for Congress and
regulators to continue to adopt legislation and regulations that
could limit or restrict the Firm’s operations, or impose
additional costs upon the Firm in order to comply with such new laws
or rules. These factors are likely to continue to adversely impact
the Firm’s revenue, credit costs, overall business volumes and
earnings.

Given the potential
stress on the consumer from rising unemployment,
the continued downward pressure on housing prices
and the elevated national inventory of unsold
homes, management remains extremely cautious with
respect to the credit outlook for home equity,
mortgage and credit card portfolios. Management expects continued deterioration
in credit trends for the home equity, mortgage and credit card portfolios, which
will likely require additions to the consumer loan
loss allowance in 2009 or beyond. Economic data released in early 2009 indicated
that housing prices and the labor market have weakened further since
year-end, and that deterioration could continue into late 2009.
Based on management’s current economic outlook,
quarterly net charge-offs could, over the next several
quarters, reach $1.0 billion to $1.4 billion for the home equity
portfolio, $375 million to $475 million for the prime mortgage
portfolio, and $375 million to $475 million for the
subprime mortgage portfolio. Management expects the
managed net charge-off rate for Card Services
(excluding the impact resulting from the
acquisition of Washington Mutual’s banking
operations) to approach 7% in the first quarter of
2009 and likely higher by the end of
the year depending on unemployment levels. These charge-off rates could increase
even further if the economic environment continues
to deteriorate

further than management’s current
expectations. The wholesale provision for credit
losses and nonperforming assets are likely to
increase over time as a result of the
deterioration in underlying credit conditions.
Wholesale net charge-offs in 2008 increased from
historic lows in 2007 and are likely to increase
materially in 2009 as a result of increasing
weakness in the credit environment.

The Investment Bank continues to be negatively
affected by the disruption in the credit and
mortgage markets, as well as by overall lower
levels of liquidity. The continuation of these
factors could potentially lead to reduced levels of
client activity, lower investment banking fees and
lower trading revenue. In addition, if the Firm’s
own credit spreads tighten, as they did in the
fourth quarter of 2008, the change in the fair
value of certain trading liabilities would also
negatively affect trading results. The Firm held
$12.6 billion (gross notional) of legacy leveraged
loans and unfunded commitments as held-for-sale as
of December 31, 2008. Markdowns averaging 45% of
the gross notional value have been taken on these
legacy positions as of December 31, 2008, resulting
in a net carrying value of $6.9 billion. Leveraged
loans and unfunded commitments are difficult to
hedge effectively, and if market conditions further
deteriorate, additional markdowns may be necessary
on this asset class. The Investment Bank also held,
at December 31, 2008, an aggregate $6.1 billion of
prime and Alt-A mortgage exposure, which is also
difficult to hedge effectively, and $875 million of
subprime mortgage exposure. In addition, the
Investment Bank had $7.7 billion of commercial
mortgage exposure. In spite of active hedging,
mortgage exposures could be adversely affected by
worsening market conditions and further deterioration
in the housing market. The combination of credit
costs and additional markdowns on the various exposures noted above
could reach or exceed $2.0 billion for the first quarter of 2009.

Earnings in Commercial Banking and Treasury &
Securities Services could decline due to the impact of tighter
spreads in the low interest rate environment or a decline in the level of liability balances. Earnings in
Treasury & Securities Services and Asset Management
will likely deteriorate if market levels continue
to decline, due to reduced levels of assets under
management, supervision and custody. Earnings in the Corporate/Private
Equity segment could be more volatile due to
increases in the size of the Firm’s investment
portfolio, which is largely comprised of
investment-grade securities. Private Equity results
are dependent upon the capital markets and at
current market levels, management believes
additional write-downs of $400 million or more are likely in the
first quarter of 2009.

Assuming
economic conditions do not worsen beyond management’s current
expectations, management continues to believe that the net income
impact of the acquisition of Washington Mutual’s
banking operations could be approximately $0.50 per
share in 2009; the Bear Stearns merger could contribute $1
billion (after-tax) annualized after 2009; and merger-related items, which include both the
Washington Mutual transaction and the Bear Stearns
merger, could be approximately $600 million
(after-tax) in 2009.

Recent
Developments
On
February 23, 2009, the Board of Directors reduced the
Firm’s quarterly common stock dividend from $0.38 to $0.05 per
share, effective for the dividend payable April 30, 2009 to
shareholders of record on April 6, 2009. The action will enable
the Firm to retain an additional $5.0 billion in common equity per
year. The Firm expects to maintain the dividend at this level for the
time being. The action was taken in order to help ensure that the
Firm’s balance sheet retained the capital strength necessary to
weather a further decline in economic conditions. The Firm intends to
return to a more normalized dividend payout as soon as feasible after
the environment has stabilized.

The following section provides a comparative
discussion of JPMorgan Chase’s Consolidated Results
of Operations on a reported basis for the three-year
period ended December 31, 2008. Factors that related
primarily to a single business segment are discussed
in more detail within that business segment. For a
discussion of the Critical Accounting Estimates Used
by the Firm that affect the Consolidated Results of
Operations, see pages 107–111 of this Annual
Report.

Revenue

Year ended December 31, (in millions)

2008

(a)

2007

2006

Investment banking fees

$

5,526

$

6,635

$

5,520

Principal transactions

(10,699

)

9,015

10,778

Lending & deposit-related fees

5,088

3,938

3,468

Asset
management, administration and

commissions

13,943

14,356

11,855

Securities gains (losses)

1,560

164

(543

)

Mortgage fees and related income

3,467

2,118

591

Credit card income

7,419

6,911

6,913

Other income

2,169

1,829

2,175

Noninterest revenue

28,473

44,966

40,757

Net interest income

38,779

26,406

21,242

Total net revenue

$

67,252

$

71,372

$

61,999

(a)

On September 25, 2008, JPMorgan Chase acquired the banking
operations of Washington Mutual Bank. On May 30, 2008, the Bear
Stearns merger was consummated. Each of these transactions was
accounted for as a purchase and their respective results of
operations are included in the Firm’s results from each
respective transaction date. For additional information on these
transactions, see Note 2 on pages 123-128 of this Annual Report.

2008 compared with 2007
Total net revenue of $67.3 billion was down $4.1
billion, or 6%, from the prior year. The decline
resulted from the extremely challenging business
environment for financial services firms in 2008.
Principal transactions revenue decreased
significantly and included net markdowns on
mortgage-related positions and leveraged lending
funded and unfunded commitments, losses on
preferred securities of Fannie Mae and Freddie Mac,
and losses on private equity investments. Also
contributing to the decline in total net revenue
were other losses and markdowns recorded in other
income, including the
Firm’s share of Bear Stearns’ losses from April 8
to May 30, 2008. These declines were largely offset
by higher net interest income, proceeds from the
sale of Visa shares in its initial public offering,
and the gain on the dissolution of the Chase
Paymentech Solutions joint venture.

Investment banking fees were down from the record
level of the prior year due to lower debt
underwriting fees, as well as lower advisory and
equity underwriting fees, both of which were at
record levels in 2007. These declines were
attributable to reduced market activity. For a
further discussion of investment banking fees,
which are primarily recorded in IB, see IB segment
results on pages 42–44 of this Annual Report.

In 2008, principal transactions revenue, which
consists of revenue from the Firm’s trading and
private equity investing activities, declined by
$19.7 billion from the prior year. Trading revenue
decreased $14.5 billion to a negative $9.8 billion
compared with a positive $4.7 billion in 2007. The
decline in trading revenue was largely driven by
higher net markdowns of $5.9 billion on mortgage-

related exposures compared with $1.4 billion in the
prior year; higher net markdowns of $4.7 billion on
leveraged lending funded and unfunded commitments
compared with $1.3 billion in the prior year;
losses of $1.1 billion on preferred securities of
Fannie Mae and Freddie Mac; and weaker equity
trading results compared with a record level in
2007. In addition, trading revenue was adversely
impacted by the Bear Stearns merger. Partially
offsetting the decline in trading revenue were
record results in rates and currencies, credit
trading, commodities and emerging markets, as well
as strong equity client revenue across products and
total gains of $2.0 billion from the widening of
the Firm’s credit spread on certain structured
liabilities and derivatives, compared with $1.3
billion in 2007. Private equity results also
declined substantially from the prior year,
swinging to losses of $908 million in 2008 from
gains of $4.3 billion in 2007. In addition, the
first quarter of 2007 included a fair value
adjustment related to the adoption of SFAS 157. For
a further discussion of principal transactions
revenue, see IB and Corporate/Private Equity
segment results on pages 42–44 and 61–63,
respectively, and Note 6 on pages 146–148 of this
Annual Report.

Lending & deposit-related fees rose from the prior
year, predominantly resulting from higher
deposit-related fees and the impact of the
Washington Mutual transaction. For a further
discussion of lending & deposit-related fees, which
are mostly recorded in RFS, TSS and CB, see the RFS
segment results on pages 45–50, the TSS segment
results on pages 56–57, and the CB segment results
on pages 54–55 of this Annual Report.

The decline in asset management, administration and
commissions revenue compared with 2007 was driven
by lower asset management fees in AM due to lower
performance fees and the effect of lower markets on
assets under management. This decline was partially
offset by an increase in commissions revenue related
predominantly to higher brokerage transaction
volume within IB’s equity markets revenue, which
included additions from Bear Stearns’ Prime
Services business; and higher administration fees
in TSS driven by wider spreads in securities
lending and increased product usage by new and
existing clients. For additional information on
these fees and commissions, see the segment
discussions for IB on pages 42–44, RFS on pages
45–50, TSS on pages 56–57, and AM on pages 58–60
of this Annual Report.

The increase in securities gains compared with the
prior year was due to the repositioning of the
Corporate investment securities portfolio as a
result of lower interest rates as part of managing
the structural interest rate risk of the Firm, and
higher gains from the sale of MasterCard shares.
For a further discussion of securities gains, which
are mostly recorded in the Firm’s Corporate
business, see the Corporate/Private Equity segment
discussion on pages 61–63 of this Annual Report.

Mortgage fees and related income increased from the
prior year, driven by higher net mortgage servicing
revenue, which benefited from an improvement in MSR
risk management results and increased loan
servicing revenue. Mortgage production revenue
increased slightly, as the impact of growth in
originations was predominantly

offset by markdowns on the mortgage warehouse
and increased reserves related to the repurchase of
previously sold loans. For a discussion of mortgage
fees and related income, which is recorded
primarily in RFS’ Consumer Lending business, see
the Consumer Lending discussion on pages 47–50 of
this Annual Report.

Credit card income rose compared with the prior
year, driven by increased interchange income due to
higher customer charge volume in CS and higher
debit card transaction volume in RFS, the impact of
the Washington Mutual transaction, and increased
servicing fees resulting from a higher level of
securitized receivables. These results were
partially offset by increases in volume-driven
payments to partners and expense related to rewards
programs. For a further discussion of credit card
income, see CS’ segment results on pages 51–53 of
this Annual Report.

Other income increased compared with the prior
year, due predominantly to the proceeds from the
sale of Visa shares in its initial public offering
of $1.5 billion, the gain on the dissolution of the
Chase Paymentech Solutions joint venture of $1.0
billion, and gains on sales of certain other
assets. These proceeds and gains were partially
offset by markdowns on certain investments,
including seed capital in AM; a $464 million charge
related to the offer to repurchase auction-rate
securities at par; losses of $423 million
reflecting the Firm’s 49.4% ownership in Bear
Stearns’ losses from
April 8 to May 30, 2008; and lower securitization
income at CS.

Net interest income rose from the prior year, due
predominantly to the following: higher
trading-related net interest income in IB, the
impact of the Washington Mutual transaction, wider
net interest spread in Corporate/Private Equity,
growth in liability and deposit balances in the
wholesale and RFS businesses, higher consumer and
wholesale loan balances, and wider spreads on
consumer loans in RFS. The Firm’s total average
interest-earning assets for 2008 were $1.4
trillion, up 23% from the prior year, driven by
higher loans, AFS securities, securities borrowed,
brokerage receivables and other interest-earning
assets balances. The Firm’s total average
interest-bearing liabilities for 2008 were $1.3
trillion, up 24% from the prior year, driven by
higher deposits, long-term debt, brokerage payables
and other borrowings balances. The net interest
yield on the Firm’s interest-earning assets, on a
fully taxable equivalent basis, was 2.87%, an
increase of 48 basis points from the prior year.

2007 compared with 2006
Total net revenue of $71.4 billion was up $9.4
billion, or 15%, from the prior year. Higher net
interest income, very strong private equity gains,
record asset management, administration and
commissions revenue, higher mortgage fees and
related income, and record investment banking fees
contributed to the revenue growth. These increases
were offset partially by lower trading revenue.

Investment banking fees grew in 2007 to a level
higher than the previous record set in 2006. Record
advisory and equity underwriting fees drove the
results, partially offset by lower debt
underwriting fees. For a further discussion of
investment banking fees, which are primarily
recorded in IB, see IB segment results on pages
42–44 of this Annual Report.

Principal transactions revenue consists of trading
revenue and private equity gains. Trading revenue
declined significantly from the 2006 level,
primarily due to net markdowns in IB of $1.4
billion on sub-prime positions, including subprime
collateralized debt obligations (“CDOs”), and $1.3
billion on leveraged lending funded loans and
unfunded commitments. Also in IB, markdowns of
securitized products related to nonsubprime
mortgages and weak credit trading performance more
than offset record revenue in currencies and strong
revenue in both rates and equities. Equities
benefited from strong client activity and record
trading results across all products. IB’s Credit
Portfolio results increased compared with the prior
year, primarily driven by higher revenue from risk
management activities. The increase in private
equity gains from 2006 reflected a significantly
higher level of gains, the classification of
certain private equity carried interest as
compensation expense and a fair value adjustment in
the first quarter of 2007 on nonpublic private
equity investments resulting from the adoption of
SFAS 157 (“Fair Value Measurements”). For a further
discussion of principal transactions revenue, see
IB and Corporate/Private Equity segment results on
pages 42–44 and 61–63, respectively, and Note 6
on pages 146–148 of this Annual Report.

Lending & deposit-related fees rose from the 2006
level, driven primarily by higher deposit-related
fees and the Bank of New York transaction. For a
further discussion of lending & deposit-related
fees, which are mostly recorded in RFS, TSS and CB,
see the RFS segment results on pages 45–50, the
TSS segment results on pages 56–57, and the CB
segment results on pages 54–55 of this Annual
Report.

Asset management, administration and commissions
revenue reached a level higher than the previous
record set in 2006. Increased assets under
management and higher performance and placement
fees in AM drove the record results. The 18% growth
in assets under management from year-end 2006 came
from net asset inflows and market appreciation
across all segments: Institutional, Retail, Private
Bank and Private Wealth Management. TSS also
contributed to the rise in asset management,
administration and commissions revenue, driven by
increased product usage by new and existing clients
and market appreciation on assets under custody.
Finally, commissions revenue increased, due mainly
to higher brokerage transaction volume (primarily
included within Fixed Income and Equity Markets
revenue of IB), which more than offset the sale of
the insurance business by RFS in the third quarter
of 2006 and a charge in the first quarter of 2007
resulting from accelerated surrenders of customer
annuities. For additional information on these fees
and commissions, see the segment discussions for IB
on pages 42–44, RFS on pages 45–50, TSS on pages
56–57, and AM on pages 58–60 of this Annual
Report.

The favorable variance resulting from securities
gains in 2007 compared with securities losses in
2006 was primarily driven by improvements in the
results of repositioning of the Corporate
investment securities portfolio. Also contributing
to the positive variance was a $234 million gain
from the sale of MasterCard shares. For a further
discussion of securities gains (losses), which are
mostly recorded in the Firm’s Corporate business,
see the Corporate/Private Equity segment discussion
on pages 61–63 of this Annual Report.

Mortgage fees and related income increased from
the prior year as MSRs asset valuation adjustments
and growth in third-party mortgage loans serviced
drove an increase in net mortgage servicing
revenue. Production revenue also grew, as an
increase in mortgage loan originations and the
classification of certain loan origination costs as
expense (loan origination costs previously netted
against revenue commenced being recorded as an
expense in the first quarter of 2007 due to the
adoption of SFAS 159) more than offset markdowns on
the mortgage warehouse and pipeline. For a
discussion of mortgage fees and related
income, which is recorded primarily in RFS’
Consumer Lending business, see the Consumer Lending
discussion on pages 47–50 of this Annual Report.

Credit card income remained relatively unchanged
from the 2006 level, as lower servicing fees earned
in connection with securitization activities, which
were affected unfavorably by higher net credit
losses and narrower loan margins, were offset by
increases in net interchange income earned on the
Firm’s credit and debit cards. For further
discussion of credit card income, see CS’ segment
results on pages 51–53 of this Annual Report.

Other income declined compared with the prior
year, driven by lower gains from loan sales and
workouts, and the absence of a $103 million gain in
the second quarter of 2006 related to the sale of
MasterCard shares in its initial public
offering. (The 2007 gain on the sale of MasterCard
shares was recorded in securities gains (losses) as
the shares were transferred to the AFS portfolio
subsequent to the IPO.) Increased income from
automobile operating leases and higher gains on the
sale of leveraged leases and student loans
partially offset the decline.

Net interest income rose from the prior
year, primarily due to the following: higher
trading-related net interest income, due to a shift
of Interest expense to principal transactions
revenue (related to certain IB structured notes to
which fair value accounting was elected in
connection with the adoption of SFAS 159); growth in
liability and deposit balances in the wholesale and
consumer businesses; a higher level of credit card
loans; the impact of the Bank of New York
transaction; and an improvement in Corporate’s net
interest spread. The Firm’s total average
interest-earning assets for 2007 were $1.1
trillion, up 12% from the prior year. The increase
was primarily driven by higher trading assets –
debt instruments, loans, and AFS
securities, partially offset by a decline in
interests in purchased receivables as a result of
the restructuring and deconsolidation during the
second quarter of 2006 of certain multi-seller
conduits that the Firm administered. The net
interest yield on these assets, on a fully taxable
equivalent basis, was 2.39%, an increase of 23 basis
points from the prior year, due in part to the
adoption of SFAS 159.

Provision for credit losses

Year ended December 31,

(in millions)

2008(b)

2007

2006

Wholesale:

Provision for credit losses

$

2,681

$

934

$

321

Provision
for credit losses – accounting conformity(a)

646

—

—

Total wholesale provision for
credit losses

3,327

934

321

Consumer:

Provision for credit losses

16,764

5,930

2,949

Provision for credit losses –
accounting conformity(a)

888

—

—

Total consumer provision for
credit losses

17,652

5,930

2,949

Total provision for credit losses

$

20,979

$

6,864

$

3,270

(a)

2008 included adjustments to the
provision for credit losses to conform the
Washington Mutual loan loss reserve methodologies
to the Firm’s methodologies in connection with
the Washington Mutual transaction.

(b)

On September 25, 2008, JPMorgan Chase acquired the banking
operations of Washington Mutual Bank. On May 30, 2008, the Bear
Stearns merger was consummated. Each of these transactions was
accounted for as a purchase and their respective results of
operations are included in the Firm’s results from each
respective transaction date. For additional information on these
transactions, see Note 2 on pages 123-128 of this Annual Report.

2008 compared with 2007
The provision for credit losses in 2008 rose by
$14.1 billion compared with the prior year due to
increases in both the consumer and wholesale
provisions. The increase in the consumer provision
reflected higher estimated losses for home equity
and mortgages resulting from declining housing
prices; an increase in estimated losses for the
auto, student and business banking loan
portfolios; and an increase in the allowance for
loan losses and higher charge-offs of credit card
loans. The increase in the wholesale provision was
driven by a higher allowance resulting from a
weakening credit environment and growth in retained
loans. The wholesale provision in the first quarter
of 2008 also included the effect of the transfer of
$4.9 billion of funded and unfunded leveraged
lending commitments to retained loans from
held-for-sale. In addition, in 2008 both the consumer
and wholesale provisions were affected by a $1.5
billion charge to conform assets acquired from
Washington Mutual to the Firm’s loan loss
methodologies. For a more detailed discussion of the
loan portfolio and the allowance for loan
losses, see the segment discussions for RFS on pages
45–50, CS on pages 51–53, IB on pages 42–44 and
CB on pages 54–55, and the Credit Risk Management
section on pages 80–99 of this Annual Report.

2007 compared with 2006
The provision for credit losses in 2007 rose $3.6
billion from the prior year due to increases in
both the consumer and wholesale provisions. The
increase in the consumer provision from the prior
year was largely due
to an increase in estimated losses related to home
equity, credit card and subprime mortgage
loans. Credit card net charge-offs in 2006 benefited
following the change in bankruptcy legislation in
the fourth quarter of 2005. The increase in the
wholesale provision from the prior year primarily
reflected an increase in the allowance for

credit losses due to portfolio activity, which
included the effect of a weakening credit
environment and portfolio growth. For a more
detailed discussion of the loan portfolio and the
allowance for loan losses, see the segment
discussions for RFS on pages 45–50, CS on pages
51–53, IB on pages 42–44, CB on pages 54–55 and
Credit Risk Management on pages 80–99 of this
Annual Report.

Noninterest expense

Year ended December 31,

(in millions)

2008(a)

2007

2006

Compensation expense

$

22,746

$

22,689

$

21,191

Noncompensation expense:

Occupancy expense

3,038

2,608

2,335

Technology, communications
and equipment expense

4,315

3,779

3,653

Professional & outside services

6,053

5,140

4,450

Marketing

1,913

2,070

2,209

Other expense

3,740

3,814

3,272

Amortization of intangibles

1,263

1,394

1,428

Total
noncompensation expense

20,322

18,805

17,347

Merger costs

432

209

305

Total noninterest expense

$

43,500

$

41,703

$

38,843

(a)

On September 25, 2008, JPMorgan Chase acquired the banking
operations of Washington Mutual Bank. On May 30, 2008, the Bear
Stearns merger was consummated. Each of these transactions was
accounted for as a purchase and their respective results of
operations are included in the Firm’s results from each
respective transaction date. For additional information on these
transactions, see Note 2 on pages 123-128 of this Annual Report.

2008 compared with 2007
Total noninterest expense for 2008 was $43.5
billion, up $1.8 billion, or 4%, from the prior
year. The increase was driven by the additional
operating costs related to the Washington Mutual
transaction and Bear Stearns merger, and investments
in the businesses, partially offset by lower
performance-based incentives.

Compensation expense increased slightly from the
prior year predominantly driven by investments in
the businesses, including headcount additions
associated with the Bear Stearns merger and
Washington Mutual transaction, largely offset by
lower performance-based incentives.

Noncompensation expense increased from the prior
year as a result of the Bear Stearns merger and
Washington Mutual transaction. Excluding the effect
of these transactions, noncompensation expense
decreased due to a net reduction in other expense
related to litigation; lower credit card and
consumer lending marketing expense; and a decrease
in the amortization of intangibles as certain
purchased credit card relationships were fully
amortized in 2007 and the amortization rate for
core deposit intangibles declined in accordance
with the amortization schedule. These decreases were
offset partially by increases in professional & outside services, driven by investments in new
product platforms in TSS, business and volume growth
in CS credit card processing and IB
brokerage, clearing and exchange transaction
processing. Also contributing to the increases were
an increase in other expense due to higher mortgage
reinsurance losses and mortgage servicing expense
due to increased delinquencies and

defaults in RFS; an increase in technology, communications and equipment expense
reflecting higher depreciation expense on owned
automobiles subject to operating leases in RFS, and
other technology-related investments across the
businesses; and, an increase in occupancy expense
partly for the expansion of RFS’ retail
distribution network. For a further discussion of
amortization of intangibles, refer to Note 18 on
pages 186–189 of this Annual Report.

For information on merger costs, refer to Note 11
on page 158 of this Annual Report.

2007 compared with 2006
Total noninterest expense for 2007 was $41.7
billion, up $2.9 billion, or 7%, from the prior
year. The increase was driven by higher
compensation expense, as well as investments
across the business segments and acquisitions.

The increase in compensation expense from 2006 was
primarily the result of investments and
acquisitions in the businesses, including
additional headcount from the Bank of New York
transaction; the classification of certain private
equity carried interest from principal
transactions revenue; the classification of certain
loan origination costs (loan origination costs
previously netted against revenue commenced being
recorded as an expense in the first quarter of
2007 due to the adoption of SFAS 159); and higher
performance-based incentives. Partially offsetting
these increases were business divestitures and
continuing business efficiencies.

Noncompensation expense increased from 2006 due to
higher professional & outside services primarily
reflecting higher brokerage expense and credit card
processing costs resulting from growth in
transaction volume, as well as investments in the
businesses and acquisitions. Also contributing to
the increase was higher other expense due to
increased net legal-related costs, reflecting a
lower level of insurance recoveries and increased
costs of credit card-related litigation, and other increases
driven by business growth and investments in the
businesses. Other noncompensation expense increases
also included higher occupancy expense driven by
ongoing investments in the businesses, in
particular, the retail distribution network and the
Bank of New York transaction; and higher technology,
communications and equipment expense due primarily
to higher depreciation expense on owned automobiles
subject to operating leases in RFS, and other
technology-related investments in the businesses to
support business growth. These increases were offset
partially by lower credit card marketing
expense; decreases due to the sale of the insurance
business at the beginning of the third quarter of
2006 and lower credit card fraud-related
losses, both in other expense. In addition, expense in
general was reduced by the effect of continuing
business efficiencies. For a discussion of
amortization of intangibles, refer to Note 18 on
pages 186–189 of this Annual Report.

For information on merger costs, refer to Note 11
on page 158 of this Annual Report.

The Firm’s income from continuing operations
before income tax expense (benefit), income tax
expense (benefit) and effective tax rate were as
follows for each of the periods indicated.

Year ended December 31,

(in millions, except rate)

2008

(a)

2007

2006

Income from continuing operations
before income tax expense (benefit)

$

2,773

$

22,805

$

19,886

Income tax expense (benefit)

(926

)

7,440

6,237

Effective tax rate

(33.4

)%

32.6

%

31.4

%

(a)

On September 25, 2008, JPMorgan Chase
acquired the banking operations of Washington
Mutual Bank. On May 30, 2008, the Bear Stearns merger was
consummated. Each of these
transactions was accounted for as a purchase and
their respective results of operations are included
in the Firm’s results from each respective
transaction date. For additional information on
these transactions, see Note 2 on pages 123–128 of
this Annual Report.

2008 compared with 2007
The decrease in the effective tax rate in 2008
compared with the prior year was the result of
significantly lower reported pretax income combined
with changes in the proportion of income subject to
U.S. federal taxes. Also contributing to the decrease
in the effective tax rate was increased business
tax credits and the realization of a $1.1 billion
benefit from the release of deferred tax
liabilities. These deferred tax liabilities were
associated with the undistributed earnings of
certain non-U.S. subsidiaries that were deemed to be
reinvested indefinitely. These decreases were
partially offset by
changes in state and local taxes, and equity losses
representing the Firm’s 49.4% ownership interest in
Bear Stearns’ losses from April 8 to May30, 2008, for which no income tax benefit was
recorded. For a further discussion of income
taxes, see Critical Accounting Estimates used by the
Firm on pages 107–111 and Note 28 on pages
197–199 of this Annual Report.

2007 compared with 2006
The increase in the effective tax rate for 2007, as compared with the prior year, was primarily the
result of higher reported pretax income combined
with changes in the proportion of income subject to
federal, state and local taxes. Also contributing to
the increase in the effective tax rate was the
recognition in 2006 of $367 million of benefits
related to the resolution of tax audits.

Income from discontinued operations

As a
result of the transaction with The Bank of
New York on October 1, 2006, the results of
operations of the selected corporate trust
businesses (i.e., trustee, paying agent, loan agency
and document management services) were reported as
discontinued operations.

Income from discontinued operations in 2006 was due
predominantly to a gain of $622 million from
exiting selected corporate trust businesses in the
fourth quarter of 2006. No income from discontinued
operations was recorded in 2008 or 2007.

Extraordinary gain

The Firm recorded an extraordinary gain of $1.9
billion in 2008 associated with the acquisition of
the banking operations of Washington Mutual. The
transaction is being accounted for under the
purchase method of accounting in accordance with
SFAS 141. The adjusted fair value of net assets of
the banking operations, after purchase accounting
adjustments, was higher than JPMorgan Chase’s purchase price. There were no extraordinary gains
recorded in 2007 or 2006.

EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES

The Firm prepares its consolidated financial
statements using accounting principles generally
accepted in the United States of America
(“U.S. GAAP”); these financial statements appear on
pages 118–216 of this Annual Report. That
presentation, which is referred to as “reported
basis,” provides the reader with an
understanding of the Firm’s results that can be
tracked consistently from year to year and enables
a comparison of the Firm’s performance with other
companies’ U.S. GAAP financial statements.

In addition to analyzing the Firm’s results on a
reported basis, management reviews the Firm’s
results and the results of the lines of business on
a “managed” basis, which is a non-GAAP financial
measure. The Firm’s definition of managed basis
starts with the reported U.S. GAAP results and
includes certain reclassifications that assume
credit card loans securitized by CS remain on the
balance

sheet and presents revenue on a fully
taxable-equivalent (“FTE”) basis. These
adjustments do not have any impact on net income
as reported by the lines of business or by the
Firm as a whole.

The presentation of CS results on a managed basis
assumes that credit card loans that have been
securitized and sold in accordance with SFAS 140
remain on the Consolidated Balance Sheets and that
the earnings on the securitized loans are
classified in the same manner as the earnings on
retained loans recorded on the Consolidated Balance
Sheets. JPMorgan Chase uses the concept of managed
basis to evaluate the credit performance and
overall financial performance of the entire managed
credit card portfolio. Operations are funded and
decisions are made about allocating resources, such
as employees and capital, based upon managed
financial information. In addition, the same
underwriting standards and ongoing risk monitoring

The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP
results to managed basis.

are used for both loans on the Consolidated
Balance Sheets and securitized loans. Although
securitizations result in the sale of credit card
receivables to a trust, JPMorgan Chase retains the
ongoing customer relationships, as the customers may
continue to use their credit cards; accordingly, the
customer’s credit performance will affect both the
securitized loans and the loans retained on the
Consolidated Balance Sheets. JPMorgan Chase believes
managed basis information is useful to
investors, enabling them to understand both the
credit risks associated with the loans reported on
the Consolidated Balance Sheets and the Firm’s
retained interests in securitized loans. For a
reconciliation of reported to managed basis results
for CS, see CS segment results on pages 51–53 of
this Annual Report. For information regarding the
securitization process, and loans and residual
interests sold and securitized, see Note 16 on pages
168–176 of this Annual Report.

Total net revenue for each of the business segments
and the Firm is presented on a FTE
basis. Accordingly, revenue from tax-exempt
securities and investments that receive tax credits
is presented in the managed results on a basis
comparable to taxable securities and
investments. This non-GAAP financial measure allows
management to assess the comparability of revenue
arising from both taxable and tax-exempt
sources. The corresponding income tax impact related
to these items is recorded within income tax
expense.

Management also uses certain non-GAAP financial
measures at the business segment level because it
believes these other non-GAAP financial measures
provide information to investors about the
underlying operational performance and trends of
the particular business segment and therefore
facilitate a comparison of the business segment with the performance of its
competitors.

(Table continued from previous page)

2006

Fully

Reported

tax-equivalent

Managed

results

Credit card (c)

adjustments

basis

$

5,520

$

—

$

—

$

5,520

10,778

—

—

10,778

3,468

—

—

3,468

11,855

—

—

11,855

(543

)

—

—

(543

)

591

—

—

591

6,913

(3,509

)

—

3,404

2,175

—

676

2,851

40,757

(3,509

)

676

37,924

21,242

5,719

228

27,189

61,999

2,210

904

65,113

3,270

2,210

—

5,480

—

—

—

—

38,843

—

—

38,843

19,886

—

904

20,790

6,237

—

904

7,141

13,649

—

—

13,649

795

—

—

795

14,444

—

—

14,444

—

—

—

—

$

14,444

$

—

$

—

$

14,444

$

3.82

$

—

$

—

$

3.82

12

%

—

%

—

%

12

%

20

—

—

20

1.04

NM

NM

1.00

63

NM

NM

60

$

483,127

$

66,950

$

—

$

550,077

1,313,794

65,266

—

1,379,060

Calculation of certain U.S. GAAP and non-GAAP metrics

The table below reflects the formulas used to
calculate both the following U.S. GAAP and
non-GAAP measures:

The Firm is managed on a line-of-business
basis. The business segment financial results
presented reflect the current organization of
JPMorgan Chase. There are six major reportable
business segments: the Investment Bank, Retail
Financial Services, Card Services, Commercial
Banking, Treasury & Securities Services and Asset
Management, as well as a Corporate/Private Equity
segment.

The business segments are determined based upon the
products and services provided, or the type of
customer served, and they reflect the manner in
which financial information is currently evaluated
by management. Results of these lines of business
are presented on a managed basis.

Business segment changes
Commencing October 1, 2008,RFS was reorganized into
the following two reporting segments: Retail
Banking and Consumer Lending. Previously, RFS
consisted of three reporting segments: Regional
Banking, Mortgage Banking and Auto Finance. The new
Retail Banking reporting segment now comprises
consumer banking and business banking activities,
which previously were reported in Regional Banking.
The new Consumer Lending reporting segment now
comprises: (a) the prior Mortgage Banking and Auto
Finance reporting segments,(b) the home equity,
student and other lending business activities which
were previously reported in the Regional Banking
reporting segment and (c) loan activity related to
prime mortgages that were originated by RFS, but
reported in the Corporate/Private Equity business
segment. This reorganization is reflected in this
Annual Report and the financial information for
prior periods has been revised to reflect the
changes as if they had been in effect throughout
all periods reported.

Description of business segment reporting methodology
Results of the business segments are intended to
reflect each segment as if it were essentially a
stand-alone business. The management reporting
process that derives business segment results
allocates income and expense using market-based
methodologies.

Business segment reporting methodologies used by
the Firm are discussed below. The Firm continues to
assess the assumptions, methodologies and reporting
classifications used for segment reporting, and
further refinements may be implemented in future
periods.

Revenue sharing
When business segments join efforts to sell
products and services to the Firm’s clients, the
participating business segments agree to share
revenue from those transactions. The segment
results reflect these revenue-sharing agreements.

Funds transfer pricing
Funds transfer pricing is used to allocate interest
income and expense to each business and transfer
the primary interest rate risk exposures to the
Treasury group within the Corporate/Private Equity
business segment. The allocation process is unique
to each business segment and considers the interest
rate risk, liquidity risk and regulatory
requirements of that segment’s stand-alone peers.
This process is overseen by the Firm’s
Asset-Liability Committee (“ALCO”). Business
segments may retain certain interest rate
exposures, subject to management approval, that
would be expected in the normal operation of a
similar peer business.

Capital allocation
Each business segment is allocated capital by
taking into consideration stand-alone peer
comparisons, economic risk measures and regulatory
capital requirements. The amount of capital
assigned to each business is referred to as equity.
Line of business equity increased during the second
quarter of 2008 in IB and AM due to the Bear
Stearns merger and, for AM, the purchase of the
additional equity interest in Highbridge. At the
end of the third quarter of 2008, equity was
increased for each line of business with a view
toward the future implementation of the new Basel
II capital rules. For further details on these
rules, see Basel II on page 72 of this Annual
Report. In addition, equity allocated to RFS,CS and
CB was increased as a result of the Washington
Mutual transaction. For a further discussion, see
Capital management—Line of business equity on page
70 of this Annual Report.

Expense allocation
Where business segments use services provided by
support units within the Firm, the costs of those
support units are allocated to the business
segments. The expense is allocated based upon
their actual cost or the lower of actual cost or
market, as well as upon usage of the services
provided. In contrast, certain other expense
related to certain corporate functions, or to
certain technology and operations, are not
allocated to the business segments and are
retained in Corporate. Retained expense includes:
parent company costs that would not be incurred if
the segments were stand-alone businesses; adjustments to align certain corporate
staff, technology and operations allocations with
market prices; and other one-time items not
aligned with the business segments.

Segment results – Managed basis(a)(b)
The following table summarizes the business segment results for the periods indicated.

Year ended December 31,

Total net revenue

Noninterest expense

(in millions, except ratios)

2008

2007

2006

2008

2007

2006

Investment Bank

$

12,214

$

18,170

$

18,833

$

13,844

$

13,074

$

12,860

Retail Financial Services

23,520

17,305

14,825

12,077

9,905

8,927

Card Services

16,474

15,235

14,745

5,140

4,914

5,086

Commercial Banking

4,777

4,103

3,800

1,946

1,958

1,979

Treasury & Securities Services

8,134

6,945

6,109

5,223

4,580

4,266

Asset Management

7,584

8,635

6,787

5,298

5,515

4,578

Corporate/Private Equity

69

4,419

14

(28

)

1,757

1,147

Total

$

72,772

$

74,812

$

65,113

$

43,500

$

41,703

$

38,843

Year ended December 31,

Net income (loss)

Return on equity

(in millions, except ratios)

2008

2007

2006

2008

2007

2006

Investment Bank

$

(1,175

)

$

3,139

$

3,674

(5

)%

15

%

18

%

Retail Financial Services

880

2,925

3,213

5

18

22

Card Services

780

2,919

3,206

5

21

23

Commercial Banking

1,439

1,134

1,010

20

17

18

Treasury & Securities Services

1,767

1,397

1,090

47

47

48

Asset Management

1,357

1,966

1,409

24

51

40

Corporate/Private Equity(c)

557

1,885

842

NM

NM

NM

Total

$

5,605

$

15,365

$

14,444

4

%

13

%

13

%

(a)

Represents reported results on a tax-equivalent basis and excludes the impact of credit
card securitizations.

(b)

On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. On
May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for
as a purchase and their respective results of operations are included in the Firm’s results from
each respective transaction date. For additional information on these transactions, see Note 2 on
pages 123-128 of this Annual Report.

(c)

Net income included an extraordinary gain of $1.9 billion related to the Washington Mutual
transaction for 2008 and income from discontinued operations of $795 million for 2006.

J.P. Morgan is one of the world’s leading
investment banks, with deep client relationships
and broad product capabilities. The Investment
Bank’s clients are corporations, financial
institutions, governments and institutional
investors. The Firm offers a full range of
investment banking products and services in all
major capital markets, including advising on
corporate strategy and structure, capital
raising in equity and debt markets,
sophisticated risk management, market-making in
cash securities and derivative instruments,
prime brokerage and research. IB also selectively commits the
Firm’s own capital to principal investing and
trading activities.

On
May 30, 2008, JPMorgan Chase merged with The Bear Stearns
Companies, Inc. The merger provided IB with a leading global prime
brokerage business and expanded the existing energy platform. It also
strengthened IB's franchise in Equity and Fixed Income Markets, as well
as client coverage.

Selected income statement data

Year ended December 31,

(in millions, except ratios)

2008(g)

2007

2006

Revenue

Investment banking fees

$

5,907

$

6,616

$

5,537

Principal transactions(a)

(7,042

)

4,409

9,512

Lending & deposit-related fees

463

446

517

Asset management, administration
and commissions

3,064

2,701

2,240

All other income(b)

(462

)

(78

)

528

Noninterest revenue

1,930

14,094

18,334

Net interest income(c)

10,284

4,076

499

Total net revenue(d)

12,214

18,170

18,833

Provision for credit losses

2,015

654

191

Credit reimbursement from TSS(e)

121

121

121

Noninterest expense

Compensation expense

7,701

7,965

8,190

Noncompensation expense

6,143

5,109

4,670

Total noninterest expense

13,844

13,074

12,860

Income (loss) before income tax
expense (benefit)

(3,524

)

4,563

5,903

Income tax expense (benefit)(f)

(2,349

)

1,424

2,229

Net income (loss)

$

(1,175

)

$

3,139

$

3,674

Financial ratios

ROE

(5

)%

15

%

18

%

ROA

(0.14

)

0.45

0.57

Overhead ratio

113

72

68

Compensation expense as
% of total net revenue

63

44

41

(a)

The 2008 results include net markdowns on
mortgage-related exposures and leveraged lending
funded and unfunded commitments of $5.9 billion
and $4.7 billion, respectively, compared with $1.4
billion and $1.3 billion, respectively, in 2007.

(b)

All other income for 2008 decreased from the
prior year due to increased revenue sharing
agreements with other business segments. All other
income for 2007 decreased from the prior year due
mainly to losses on loan sales and lower gains on
sales of assets.

(c)

Net interest income for 2008 increased from the
prior year due to an increase in interest-earning
assets, including the addition of the Bear Stearns’
Prime Services business combined with wider spreads
on certain fixed income products. The increase in
2007 from the prior year was due primarily to an
increase in interest-earning assets.

(d)

Total net
revenue included tax-equivalent adjustments,
predominantly due to income tax credits related to
affordable housing investments and tax-exempt
income from municipal bond investments of $1.7 billion, $927 million and $802 million for 2008,
2007 and 2006,respectively.

(e)

TSS is charged a credit reimbursement related
to certain exposures managed within IB credit
portfolio on behalf of clients shared with TSS.

(f)

The income tax benefit in 2008 includes the
result of reduced deferred tax liabilities on
overseas earnings.

The following table provides IB’s total net revenue by business segment.

Year ended December 31,

(in millions)

2008(d)

2007

2006

Revenue by business

Investment banking fees:

Advisory

$

2,008

$

2,273

$

1,659

Equity underwriting

1,749

1,713

1,178

Debt underwriting

2,150

2,630

2,700

Total investment banking fees

5,907

6,616

5,537

Fixed income markets(a)

1,957

6,339

8,736

Equity markets(b)

3,611

3,903

3,458

Credit portfolio(c)

739

1,312

1,102

Total net revenue

$

12,214

$

18,170

$

18,833

Revenue by region

Americas

$

2,530

$

8,165

$

9,601

Europe/Middle East/Africa

7,681

7,301

7,421

Asia/Pacific

2,003

2,704

1,811

Total net revenue

$

12,214

$

18,170

$

18,833

(a)

Fixed income markets include client and
portfolio management revenue related to both
market-making and proprietary risk-taking across
global fixed income markets, including foreign
exchange, interest rate, credit and commodities
markets.

Credit portfolio revenue includes net interest
income, fees and the impact of loan sales activity,
as well as gains or losses on securities received
as part of a loan restructuring, for IB’s credit
portfolio. Credit portfolio revenue also includes
the results of risk management related to the
Firm’s lending and derivative activities, and
changes in the credit valuation adjustment, which
is the component of the fair value of a derivative
that reflects the credit quality of the
counterparty. Additionally, credit portfolio
revenue incorporates an adjustment to the valuation
of the Firm’s derivative liabilities as a result of
the adoption of SFAS 157 on January 1, 2007. See
pages 80–99 of the Credit Risk Management section
of this Annual Report for further discussion.

2008 compared with 2007
Net loss was $1.2 billion, a decrease of $4.3
billion from the prior year, driven by lower total
net revenue, a higher provision for credit losses
and higher noninterest expense, partially offset by
a reduction in deferred tax liabilities on overseas
earnings.

Total net revenue was $12.2 billion, down $6.0
billion, or 33%, from the prior year. Investment
banking fees were $5.9 billion, down 11% from the
prior year, driven by lower debt underwriting and
advisory fees reflecting reduced market activity.
Debt underwriting fees were $2.2 billion, down 18%
from the prior year, driven by lower loan
syndication and bond underwriting fees. Advisory
fees of $2.0 billion declined 12% from the prior
year. Equity underwriting fees were $1.7 billion,
up 2%
from the prior year driven by improved market
share. Fixed Income Markets revenue was $2.0
billion, compared with $6.3 billion in the prior
year. The decrease was driven by $5.9

billion of net markdowns on mortgage-related
exposures and $4.7 billion of net markdowns on
leveraged lending funded and unfunded commitments.
Revenue was also adversely impacted by additional
losses and cost to risk reduce related to Bear
Stearns’ positions. These results were offset by
record performance in rates and currencies, credit
trading, commodities and emerging markets as well
as $814 million of gains from the widening of the
Firm’s credit spread on certain structured
liabilities and derivatives. Equity Markets revenue
was $3.6 billion, down 7% from the prior year,
reflecting weak trading results, partially offset
by strong client revenue across products including
prime services, as well as $510 million of gains
from the widening of the Firm’s credit spread on
certain structured liabilities and derivatives.
Credit portfolio revenue was $739 million, down
44%, driven by losses from widening counterparty
credit spreads.

The provision for credit
losses was $2.0 billion,
an increase of $1.4 billion from the prior year,
predominantly reflecting a higher allowance for
credit losses, driven by a weakening credit
environment, as well as the effect of the transfer
of $4.9 billion of funded and unfunded leveraged
lending commitments to retained loans from
held-for-sale in the first quarter of 2008. Net
charge-offs for the year were $105 million,
compared with $36 million in the prior year. Total
nonperforming assets were $2.5 billion, an increase
of $2.0 billion compared with the prior year,
reflecting a weakening credit environment. The
allowance for loan losses to average loans was
4.71% for 2008, compared with a ratio of 2.14% in
the prior year.

Return on equity was a negative 5% on $26.1 billion
of average allocated capital, compared with 15% on
$21.0 billion in the prior year.

2007 compared with 2006
Net income was $3.1 billion, a decrease of $535
million, or 15%, from the prior year. The decrease
reflected lower fixed income revenue, a higher
provision for credit losses and increased
noninterest expense, partially offset by record
investment banking fees and equity markets revenue.

Total net revenue was $18.2 billion, down $663
million, or 4%,from the prior year. Investment
banking fees were $6.6 billion, up 19% from the
prior year, driven by record
fees across advisory and equity underwriting,
partially offset by lower debt underwriting fees.
Advisory fees were $2.3 billion, up 37%, and equity
underwriting fees were $1.7 billion, up 45%; both
were driven by record performance across all
regions. Debt underwriting fees of $2.6 billion
declined 3%, reflecting lower loan syndication and
bond underwriting fees, which were negatively
affected by market conditions in the second half of
the year. Fixed Income Markets revenue decreased
27% from the prior year. The decrease was due to
net markdowns of $1.4 billion on subprime
positions, including subprime CDOs and net
markdowns of $1.3 billion on leveraged lending
funded loans and unfunded commitments. Fixed Income
Markets revenue also decreased due to markdowns in
securitized products on nonsubprime mortgages and
weak credit trading performance. These lower

results were offset partially by record revenue in
currencies and strong revenue in rates. Equity
Markets revenue was $3.9 billion, up 13%, benefiting
from strong client activity and record trading
results across all products. Credit Portfolio
revenue was $1.3 billion, up 19%, primarily due to
higher revenue from risk management activities,
partially offset by lower gains from loan sales and
workouts.

The provision for credit losses was $654 million,
an increase of $463 million from the prior year.
The change was due to a net increase of $532
million in the allowance for credit losses,
primarily due to portfolio activity, which included
the effect of a weakening credit environment, and
an increase in allowance for unfunded leveraged
lending commitments, as well as portfolio growth.
In addition, there were $36 million of net
charge-offs in 2007, compared with $31 million of
net recoveries in the prior year. The allowance for
loan losses to average loans was 2.14% for
2007, compared with a ratio of 1.79% in the prior
year.

Noninterest expense was $13.1 billion, up $214
million, or 2%, from the prior year.

Return on equity was 15% on $21.0 billion of
allocated capital compared with 18% on $20.8
billion in 2006.

Selected metrics

Year ended December 31,

(in millions, except headcount)

2008

2007

2006

Selected balance sheet data
(period-end)

Equity

$

33,000

$

21,000

$

21,000

Selected balance sheet data
(average)

Total assets

$

832,729

$

700,565

$

647,569

Trading assets–debt and
equityinstruments(a)

350,812

359,775

275,077

Trading assets–derivative
receivables

112,337

63,198

54,541

Loans:

Loans retained(b)

73,108

62,247

58,846

Loans held-for-sale and loans
at fair value(a)

18,502

17,723

21,745

Total loans

91,610

79,970

80,591

Adjusted assets(c)

679,780

611,749

527,753

Equity

26,098

21,000

20,753

Headcount

27,938

25,543

23,729

(a)

As a result of the adoption of SFAS 159 in
the first quarter of 2007, $11.7 billion of loans
were reclassified to trading assets. Loans
held-for-sale and loans at fair value were excluded
when calculating the allowance coverage ratio and
net charge-off (recovery) rate.

Adjusted assets, a non-GAAP financial measure,
equals total assets minus (1) securities purchased
under resale agreements and securities borrowed
less securities sold, not yet purchased; (2) assets
of variable interest entities (“VIEs”) consolidated
under FIN 46R; (3) cash and securities segregated
and on deposit for regulatory and other
purposes; (4) goodwill and intangibles; (5)
securities received as collateral; and (6)
investments purchased under the Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity
Facility. The amount of adjusted assets is
presented to assist the reader in comparing IB’s
asset and capital levels to other investment banks
in the securities industry. Asset-to-equity
leverage ratios are commonly used as one measure to
assess a company’s capital adequacy. IB believes an
adjusted asset amount that excludes the assets
discussed above, which were considered to have a
low risk profile, provides a more meaningful
measure of balance sheet leverage in the securities
industry.

Nonperforming loans included loans
held-for-sale and loans at fair value of $32
million, $50 million and $3 million at December31, 2008, 2007 and 2006, respectively, which were
excluded from the allowance coverage ratios.
Nonperforming loans at December 31, 2006, excluded
distressed loans held-for-sale that were purchased
as part of IB’s proprietary activities. As a result
of the adoption of SFAS 159 in the first quarter of
2007, these loans were reclassified to trading
assets.

(b)

As a result of the adoption of SFAS 159 in the
first quarter of 2007, $11.7 billion of loans were
reclassified to trading assets.

(c)

Loans held-for-sale and loans at fair value
were excluded when calculating the allowance
coverage ratio and net charge-off (recovery)
rate.

(d)

Results for 2008 include seven months of the
combined Firm’s (JPMorgan Chase’s and Bear
Stearns’) results and five months of heritage
JPMorgan Chase results. All prior periods reflect
heritage JPMorgan Chase results. For a more
complete description of value-at-risk (“VaR”), see
pages 100–103 of this Annual Report.

(e)

Average VaRs were less than the sum of the VaRs
of their market risk components, which was due to
risk offsets resulting from portfolio
diversification. The diversification effect
reflected the fact that the risks were not
perfectly correlated. The risk of a portfolio of
positions is usually less than the sum of the risks
of the positions themselves.

(f)

Trading VaR
includes predominantly all trading activities in
IB; however, particular risk parameters of certain
products are not fully captured, for example,
correlation risk. Trading VaR does not include VaR related to
held-for-sale funded loans and unfunded
commitments, nor the debit valuation adjustments
(“DVA”) taken on derivative and structured
liabilities to reflect the credit quality of the
Firm. See the DVA Sensitivity table on page 103
of this Annual Report for further details.
Trading VaR also does not include the MSR
portfolio or VaR related to other corporate
functions, such as Corporate/Private Equity.
Beginning in the fourth quarter of 2008, trading
VaR includes the estimated credit spread
sensitivity of certain mortgage products.

(g)

Included VaR on derivative credit valuation
adjustments (“CVA”), hedges of the CVA and
mark-to-market hedges of the retained loan
portfolio, which were all reported in principal
transactions revenue. This VaR does not include the
retained loan portfolio.

(h)

Excluding the impact
of a loan originated in March 2008 to Bear Stearns,
the adjusted ratio would be 4.84% for 2008. The
average balance of the loan extended to Bear
Stearns was $1.9 billion for 2008. The allowance for
loan losses to period-end loans was 4.83% and 1.92%
at December 31, 2008 and 2007, respectively.

Market shares and rankings(a)

2008

2007

2006

Market

Market

Market

December 31,

share

Rankings

share

Rankings

share

Rankings

Global debt, equity
and equity-related

10%

#1

8%

#2

7%

#2

Global syndicated loans

12

1

13

1

14

1

Global long-term debt (b)

9

2

7

3

6

3

Global equity and
equity-related(c)

12

1

9

2

7

6

Global announced
M&A(d)

27

2

27

4

26

4

U.S. debt, equity and
equity-related

16

1

10

2

9

2

U.S. syndicated loans

26

1

24

1

26

1

U.S. long-term debt(b)

15

1

10

2

9

2

U.S. equity and
equity-related(c)

16

1

11

5

8

6

U.S. announced M&A(d)

33

3

28

3

29

3

(a)

Source: Thomson Reuters. The results for 2008 are pro forma for the Bear Stearns
merger. The results for 2007 and 2006 represent heritage JPMorgan Chase only.

Includes rights offerings; U.S. domiciled equity and equity-related transactions.

(d)

Global announced M&A is based upon rank value; all other rankings are based
upon proceeds, with full credit to each book manager/equal if joint. Because of joint
assignments, market share of all participants will add up to more than 100%.
Global and U.S. announced M&A market share and rankings for 2007 and 2006
include transactions withdrawn since December 31, 2007 and 2006. U.S.
announced M&A represents any U.S. involvement ranking.

According to Thomson Reuters, in 2008, the Firm
improved its positions to #1 in Global Debt,
Equity and Equity-related transactions and Global
Equity and Equity-related transactions; and
improved its position to #2 in Global Long-term
Debt and Global Announced M&A. The Firm maintained
its #1 position in Global Syndicated Loans.

According to Dealogic, the Firm was ranked #1
in Investment Banking fees generated during
2008, based upon revenue.

Retail Financial Services, which includes
the Retail Banking and Consumer Lending
reporting segments, serves consumers and
businesses through multiple channels.
Customers can use more than 5,400 bank branches
(third-largest nationally),14,500 ATMs
(second-largest nationally) as well as online
and mobile banking. More than 21,400 branch
salespeople assist customers with checking and
savings accounts, mortgages, home equity and
business loans,and investments across the
23-state footprint from New York and Florida to
California. Consumers also can obtain loans
through more than 16,000 auto dealerships and
4,800 schools and universities nationwide.

On September 25, 2008, JPMorgan Chase acquired the
banking operations of Washington Mutual from the
FDIC for $1.9 billion through a purchase of
substantially all of the assets and assumption of
specified liabilities of Washington Mutual.
Washington Mutual’s banking operations consisted
of a retail bank network of 2,244 branches, a
nationwide credit card lending business, a
multi-family and commercial real estate lending
business, and nationwide mortgage banking
activities. The transaction expanded the Firm’s
U.S. consumer branch network in California,
Florida, Washington,
Georgia, Idaho, Nevada and Oregon and created the
nation’s third-largest branch network.

During the first quarter of 2006, RFS completed the
purchase of Collegiate Funding Services, which
contributed a student loan servicing capability and
provided an entry into the Federal Family Education
Loan Program consolidation market. On July1, 2006, RFS sold its life insurance and annuity
underwriting businesses to Protective Life
Corporation. On October 1, 2006, JPMorgan Chase
completed the Bank of New York transaction,
significantly strengthening RFS’ distribution
network in the New York tri-state area.

Selected income statement data

Year ended December 31,

(in millions)

2008

2007

2006

Revenue

Lending & deposit-related fees

$

2,546

$

1,881

$

1,597

Asset management, administration
and commissions

1,510

1,275

1,422

Securities gains (losses)

—

1

(57

)

Mortgage fees and related income(a)

3,621

2,094

618

Credit card income

939

646

523

Other income

739

882

557

Noninterest revenue

9,355

6,779

4,660

Net interest income

14,165

10,526

10,165

Total net revenue

23,520

17,305

14,825

Provision for credit losses

9,905

2,610

561

Noninterest expense

Compensation expense(a)

5,068

4,369

3,657

Noncompensation expense(a)

6,612

5,071

4,806

Amortization of intangibles

397

465

464

Total noninterest expense

12,077

9,905

8,927

Year ended December 31,

(in millions, except ratios)

2008

2007

2006

Income before income
tax expense

1,538

4,790

5,337

Income tax expense

658

1,865

2,124

Net income

$

880

$

2,925

$

3,213

Financial ratios

ROE

5

%

18

%

22

%

Overhead ratio

51

57

60

Overhead ratio excluding core
deposit intangibles(b)

50

55

57

(a)

The Firm adopted SFAS 159 in the first quarter of 2007. As a result, beginning in
the first quarter of 2007, certain loan-origination costs have been classified as
expense.

(b)

Retail Financial Services uses the overhead ratio (excluding the amortization of core
deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the
overhead ratio calculation results in a higher overhead ratio in the earlier years and
a lower overhead ratio in later years; this method would result in an improving
overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes
Retail Baking’s core deposit intangible amortization expense related to the Bank of
New York transaction and the Bank One merger of $394 million, $460 million and
$458 million for the years ended December 31, 2008, 2007 and 2006, respectively.

2008 compared with 2007
Net income was $880 million, a decrease of $2.0 billion, or 70%, from the prior year, as a significant increase in
the provision for credit losses was partially offset by positive MSR risk management results and
the positive impact of the Washington Mutual transaction.

Total net revenue was $23.5 billion,
an increase of $6.2 billion, or 36%, from the prior year. Net
interest income was $14.2 billion, up $3.6 billion, or 35%, benefiting from the Washington Mutual
transaction, wider loan and deposit spreads, and higher loan and deposit balances. Noninterest
revenue was $9.4 billion, up $2.6 billion, or 38%, as positive MSR risk management results, the
impact of the Washington Mutual transaction, higher mortgage origination volume and higher
deposit-related fees were partially offset by an increase in reserves related to the repurchase of
previously sold loans and markdowns on the mortgage warehouse.

The provision for credit losses was $9.9 billion, an increase of $7.3 billion from the prior year.
Delinquency rates have increased due to overall weak economic conditions, while housing price
declines have continued to drive increased loss severities, particularly for high loan-to-value
home equity and mortgage loans. The provision includes $4.7 billion in additions to the allowance
for loan losses for the heritage Chase home equity and mortgage portfolios. Home equity net
charge-offs were $2.4 billion (2.23% net charge-off rate; 2.39% excluding purchased credit-impaired
loans), compared with $564 million (0.62% net charge-off rate) in the prior year. Subprime
mortgage net charge-offs were $933 million (5.49% net charge-off rate; 6.10% excluding purchased
credit-impaired loans),compared with $157 million (1.55% net charge-off rate) in the prior year.
Prime mortgage net charge-offs were $526 million (1.05% net charge-off rate; 1.18% excluding
purchased credit-impaired loans), compared with $33 million (0.13% net charge-off rate) in the prior
year. The provision for credit losses was also affected by an increase in estimated losses for the
auto, student and business banking loan portfolios.

Total noninterest expense was $12.1 billion, an
increase of $2.2 billion, or 22%, from the prior
year, reflecting the impact of the Washington
Mutual transaction, higher mortgage reinsurance
losses, higher mortgage servicing expense and
investments in the retail distribution network.

2007 compared with 2006
Net income was $2.9 billion, a decrease of $288
million, or 9%, from the prior year, as a decline
in Consumer Lending was offset partially by
improved results in Retail Banking.

Total net revenue was $17.3 billion, an increase of
$2.5 billion, or 17%, from the prior year. Net
interest income was $10.5 billion, up $361 million,
or 4%, due to the Bank of New York transaction,
wider loan spreads and higher deposit balances.
These benefits were offset partially by the sale of
the insurance business and a shift to
narrower–spread deposit products. Noninterest
revenue was $6.8 billion, up $2.1 billion,
benefiting from positive MSR risk management
results; an increase in deposit-related fees; and
the absence of a prior-year $233 million loss
related to $13.3 billion of mortgage loans
transferred to held-for-sale. Noninterest revenue
also benefited from the classification of certain
mortgage loan origination costs as expense (loan
origination costs previously netted against revenue
commenced being recorded as an expense in the first
quarter of 2007 due to the adoption of SFAS 159).

The provision for credit losses was $2.6 billion,
compared with $561 million in the prior year. The
current year provision includes a net increase of
$1.0 billion in the allowance for loan losses
related to home equity loans as continued weak
housing prices have resulted in an increase in
estimated losses for high loan-to-value loans. Home
equity net charge-offs were $564 million (0.62% net
charge-off rate), compared with $143 million (0.18%
net charge-off rate) in the prior year. In
addition, the current-year provision includes a
$166 million increase in the allowance for loan
losses related to subprime mortgage loans,
reflecting an increase in estimated losses and
growth in the portfolio. Subprime mortgage net
charge-offs were $157 million (1.55% net charge-off
rate),compared with $47 million (0.34% net
charge-off rate) in the prior year.

Total noninterest expense was $9.9 billion, an
increase of $978 million, or 11%, from the prior
year due to the Bank of New York transaction; the
classification of certain loan origination costs as
expense due to the adoption of SFAS 159;
investments in the retail distribution network; and
higher mortgage production and servicing expense.
These increases were offset partially by the sale
of the insurance business.

Loans included prime mortgage loans originated with the intent to sell, which, for
new originations on or after January 1, 2007, were accounted for at fair value under
SFAS 159. These loans, classified as trading assets on the Consolidated Balance
Sheets, totaled $8.0 billion and $12.6 billion at December 31, 2008 and 2007,
respectively. Average loans included prime mortgage loans, classified as trading
assets on the Consolidated Balance Sheets, of $14.2 billion and $11.9 billion for the
years ended December 31, 2008 and 2007, respectively.

(b)

Excludes purchased credit-impaired loans accounted for
under SOP 03-3 that were acquired as part of the Washington Mutual transaction.
These loans were accounted for on a pool basis and the pools are considered to be
performing under SOP 03-3.

(c)

Nonperforming loans and assets included loans held-for-sale and loans accounted
for at fair value of $236 million, $69 million and $116 million at December 31,2008, 2007 and 2006, respectively. Certain of these loans are classified as trading
assets on the Consolidated Balance Sheets.

(d)

Nonperforming loans and assets excluded (1) loans eligible for repurchase as well
as loans repurchased from Governmental National Mortgage Association (“GNMA”)
pools that are insured by U.S. government agencies of $3.3 billion, $1.5 billion and
$1.2 billion at December 31, 2008, 2007 and 2006, respectively, and (2) student
loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program of $437 million,
$417 million and $387 million at December 31, 2008, 2007 and 2006, respectively.
These amounts were excluded, as reimbursement is proceeding normally.

During the second quarter of 2008, the policy for classifying subprime mortgage
and home equity loans as nonperforming was changed to conform to all other
home lending products. Amounts for 2007 have been revised to reflect
this change. Amounts for 2006 have not been revised as the impact
was not material.

(f)

Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and the net charge-off rate.

(g)

Excludes the impact of purchased credit-impaired loans accounted for under SOP
03-3 that were acquired as part of the Washington Mutual transaction at December31, 2008. These loans were accounted for at fair value on the acquisition date,
which included the impact of credit losses over the remaining life of the portfolio.
Accordingly, no allowance for loan losses has been recorded for these loans.

Retail Banking

Selected income statement data

Year ended December 31,

(in millions, except ratios)

2008

2007

2006

Noninterest revenue

$

4,951

$

3,763

$

3,259

Net interest income

7,659

6,193

5,698

Total net revenue

12,610

9,956

8,957

Provision for credit losses

449

79

114

Noninterest expense

7,232

6,166

5,667

Income before income
tax expense

4,929

3,711

3,176

Net income

$

2,982

$

2,245

$

1,922

Overhead ratio

57

%

62

%

63

%

Overhead ratio excluding core
deposit intangibles(a)

54

57

58

(a)

Retail Banking uses the overhead ratio (excluding the amortization of core deposit
intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying
expense trends of the business. Including CDI amortization expense in the overhead
ratio calculation results in a higher overhead ratio in the earlier years and a lower
overhead ratio in later years; this method would result in an improving overhead
ratio over time, all things remaining equal. This ratio excludes Retail Baking’s core
deposit intangible amortization expense related to the Bank of New York transaction and the Bank One merger of $394 million, $460 million and $458 million for
the years ended December 31, 2008, 2007 and 2006, respectively.

2008 compared with 2007
Retail Banking net income was $3.0 billion, up $737
million, or 33%, from the prior year. Total net
revenue was $12.6 billion, up $2.7 billion, or 27%,
reflecting the impact of the Washington Mutual
transaction, wider deposit spreads, higher
deposit-related fees, and higher deposit balances.
The provision for credit losses was $449 million,
compared with $79 million in the prior year,
reflecting an increase in the allowance for loan
losses for Business Banking loans due to higher
estimated losses on the portfolio. Noninterest
expense was $7.2 billion, up $1.1 billion, or 17%,
from the prior year, due to the Washington Mutual
transaction and investments in the retail
distribution network.

2007 compared with 2006
Retail Banking net income was $2.2 billion, an
increase of $323 million, or 17%, from the prior
year. Total net revenue was $10.0 billion, up $1.0
billion, or 11%, benefiting from the following: the
Bank of New York
transaction; increased deposit-related fees; and
growth in deposits. These benefits were offset
partially by a shift to narrower-spread deposit
products. The provision for credit losses was $79
million, compared with $114 million in the prior
year. Noninterest expense was $6.2 billion, up $499
million, or 9%, from the prior year, driven by the
Bank of New York transaction and investments in the
retail distribution network.

2008 compared with 2007
Consumer Lending net loss was $2.1 billion,
compared with net income of $680 million in the
prior year. Total net revenue was $10.9 billion, up
$3.6 billion, or 48%, driven by higher mortgage
fees and related income (due primarily to positive
MSR risk management results), the impact of the
Washington Mutual transaction, higher loan balances
and wider loan spreads.

The increase in mortgage fees and related income
was primarily driven by higher net mortgage
servicing revenue. Mortgage production revenue of
$898 million was up $18 million, as higher mortgage
origination volume was predominantly offset by an
increase in reserves related to the repurchase of
previously sold loans and markdowns of the mortgage
warehouse. Net mortgage servicing revenue (which
includes loan servicing revenue, MSR risk
management results and other changes in fair value)
was $2.7 billion, an increase of $1.5 billion, or
124%, from the prior year. Loan servicing revenue
was $3.3 billion, an increase of $924 million.
Third-party loans serviced increased 91%, primarily
due to the Washington Mutual transaction. MSR risk
management results were $1.5 billion, compared with
$411 million in the prior year. Other changes in
fair value of the MSR asset were negative $2.1
billion, compared with negative $1.5 billion in the
prior year.

The provision for credit losses was $9.5 billion,
compared with $2.5 billion in the prior year. The
provision reflected weakness in the home equity and
mortgage portfolios (see Retail Financial Services
discussion of the provision for credit losses for
further detail).

Noninterest expense was $4.8 billion, up $1.1
billion, or 30%, from the prior year, reflecting
higher mortgage reinsurance losses, the impact of
the Washington Mutual transaction and higher
servicing expense due to increased delinquencies
and defaults.

2007 compared with 2006
Consumer Lending net income was $680 million, a
decrease of $611 million, or 47%, from the prior
year. Total net revenue was $7.3 billion, up $1.5
billion, or 25%, benefiting from positive MSR risk
management results, increased mortgage production
revenue, wider loan spreads and the absence of a
prior-year $233 million loss related to $13.3
billion of mortgage loans transferred to
held-for-sale. These benefits were offset partially
by the sale of the insurance business.

Mortgage production revenue was $880 million, up
$576 million, reflecting the impact of an increase
in mortgage loan originations and the
classification of certain loan origination costs as
expense (loan origination costs previously netted
against revenue commenced being recorded as an
expense in the first quarter of 2007 due to the
adoption of SFAS 159).These benefits were offset
partially by markdowns of $241 million on the
mortgage warehouse and pipeline. Net mortgage
servicing revenue, which includes loan servicing
revenue, MSR risk management results and other
changes in fair value, was $1.2 billion, compared
with $314 million in the prior year. Loan servicing
revenue of $2.3 billion increased $195 million on
17% growth in third-party loans serviced. MSR risk
management results were positive $411 million
compared with negative $385 million in the prior
year. Other changes in fair value of the MSR asset
were negative $1.5 billion, compared with negative
$1.4 billion in the prior year.

The provision for credit losses was $2.5 billion,
compared with $447 million in the prior year. The
increase in the provision was due to the home
equity and subprime mortgage portfolios (see Retail
Financial Services discussion of the provision for
credit losses for further detail).

Noninterest expense was $3.7 billion, an increase
of $479 million, or 15%. The increase reflected the
classification of certain loan origination costs
due to the adoption of SFAS 159; higher servicing
costs due to increased delinquencies and defaults;
higher production expense due to growth in
originations; and increased depreciation expense on
owned automobiles subject to operating leases.
These increases were offset partially by the sale
of the insurance business.

Excludes the impact of purchased credit-impaired loans accounted for under SOP
03-3 that were acquired as part of the Washington Mutual transaction. Under SOP
03-3, these loans were accounted for at fair value on the acquisition date, which
includes the impact of estimated credit losses over the remaining lives of the loans.
Accordingly, no charge-offs and no allowance for loan losses has been recorded for
these loans.

(b)

Average loans included loans held-for-sale of $2.8 billion, $10.6 billion and $16.1
billion for the years ended December 31, 2008, 2007 and 2006, respectively. These
amounts were excluded when calculating the net charge-off rate.

(c)

Excluded loans eligible for repurchase as well as loans repurchased from GNMA
pools that are insured by U.S. government agencies of $3.2 billion, $1.2 billion and
$960 million, at December 31, 2008 ,2007 and 2006,
respectively. These amounts
were excluded, as reimbursement is proceeding normally.

(d)

Excluded loans that are 30 days past due and still accruing, which are insured by
U.S. government agencies under the Federal Family Education Loan Program of
$824 million, $663 million and $464 million at December 31, 2008, 2007 and
2006, respectively. These amounts are excluded as reimbursement is proceeding
normally.

(e)

Excludes purchased credit-impaired loans. The 30+
day delinquency rate for these loans was 17.89% at December 31,2008. There were no purchased credit-impaired loans at
December 31, 2007 and 2006.

(f)

Nonperforming assets excluded (1) loans eligible for repurchase as well as loans
repurchased from Governmental National Mortgage Association (“GNMA”) pools
that are insured by U.S. government agencies of $3.3 billion, $1.5 billion and $1.2
billion at December 31, 2008, 2007 and 2006, respectively, and (2) student loans
that are 90 days past due and still accruing, which are insured by U.S. government
agencies under the Federal Family Education Loan Program of $437 million, $417
million and $387 million at December 31, 2008, 2007 and 2006, respectively. These
amounts for GNMA and student loans are excluded, as reimbursement is proceeding normally.

(g)

During the second quarter of 2008, the policy for classifying subprime mortgage
and home equity loans as nonperforming was changed to conform to all other
home lending products. Amounts for 2007 have been revised to reflect
this change. Amounts for 2006 have not been revised as the impact was not material.

(h)

Excludes purchased credit-impaired loans accounted for under SOP 03-3 that were
acquired as part of the Washington Mutual transaction. These loans are accounted
for on a pool basis, and the pools are considered to be performing under SOP 03-3.

Included $14.2 billion and $11.9 billion
of prime mortgage loans at fair value for the
years ended December 31, 2008 and 2007,
respectively.

Mortgage origination channels comprise the following:

Retail – Borrowers who are buying or refinancing a home
through direct contact with a mortgage banker employed by the
Firm using a branch office, the Internet or by phone. Borrowers
are frequently referred to a mortgage banker by real estate brokers, home builders or other third parties.

Wholesale – A third-party mortgage
broker refers loan applications to a mortgage banker at the Firm. Brokers are independent
loan originators that specialize in finding and counseling borrowers
but do not provide funding for loans.

Correspondent – Banks, thrifts, other mortgage banks and
other financial institutions that sell closed loans to the Firm.

Changes in MSR asset fair value due to inputs or
assumptions in model – Represents MSR asset fair value
adjustments due to changes in market-based inputs, such as
interest rates and volatility, as well as updates to valuation
assumptions used in the valuation model.

Changes
in MSR asset fair value due to other changes –
Includes changes in the MSR value due to modeled servicing
portfolio runoff (or time decay).

Derivative valuation adjustments and
other – Changes in
the fair value of derivative instruments used to offset the impact
of changes in market-based inputs to the MSR valuation model.

MSR
risk management results – Includes changes in MSR
asset fair value due to inputs or assumptions and derivative valuation adjustments and other.

Chase Card Services is one of the nation’s largest card
issuers with more than 168 million credit cards in circulation and more than $190 billion in
managed loans.
Customers used Chase cards to meet more than $368
billion worth of their spending needs in 2008. Chase has
a market leadership position in building loyalty and
rewards programs with many of the world’s most
respected brands and through its proprietary products,
which include the Chase Freedom program.

Through its merchant acquiring business, Chase
Paymentech Solutions, Chase is one of the leading
processors of MasterCard and Visa payments.

JPMorgan Chase uses the concept of “managed basis” to evaluate
the credit performance of its credit card loans, both loans on the balance sheet and loans that
have been securitized. For further information, see Explanation and reconciliation of the Firm’s
use of non-GAAP financial measures on pages 38–39 of this Annual Report.
Managed results exclude the impact of credit card securitizations on
total net revenue, the provision for credit losses, net charge-offs and
loan receivables. Securitization does not change reported net income;
however, it does affect the classification of items on the Consolidated
Statements of Income and Consolidated Balance Sheets.

The following discussion of CS’ financial results reflects the acquisition of Washington Mutual’s
credit card operations, including $28.3
billion of managed credit card loans, as a result of the Washington Mutual transaction on September 25, 2008, and
the dissolution of the Chase
Paymentech Solutions joint venture on November 1, 2008. See Note
2 on pages 123–128 of this Annual Report for more information
concerning these transactions.

Selected income statement data – managed basis

Year ended December 31,

(in millions, except ratios)

2008

2007

2006

Revenue

Credit card income

$

2,768

$

2,685

$

2,587

All other income

(49

)

361

357

Noninterest revenue

2,719

3,046

2,944

Net interest income

13,755

12,189

11,801

Total net revenue

16,474

15,235

14,745

Provision for credit losses

10,059

5,711

4,598

Noninterest expense

Compensation expense

1,127

1,021

1,003

Noncompensation expense

3,356

3,173

3,344

Amortization of intangibles

657

720

739

Total noninterest expense

5,140

4,914

5,086

Income before income tax
expense

1,275

4,610

5,061

Income tax expense

495

1,691

1,855

Net income

$

780

$

2,919

$

3,206

Memo: Net securitization
gains (amortization)

$

(183

)

$

67

$

82

Financial ratios

ROE

5

%

21

%

23

%

Overhead ratio

31

32

34

2008 compared with 2007
Net income was $780 million, a decline of $2.1
billion, or 73%, from the prior year. The decrease
was driven by a higher provision for credit losses,
partially offset by higher total net revenue.

Average managed loans were $162.9 billion, an
increase of $13.5 billion, or 9%, from the prior
year. Excluding Washington Mutual, average managed
loans were $155.9 billion. End-of-period managed
loans were $190.3 billion, an increase of $33.3
billion, or 21%, from the prior year. Excluding
Washington Mutual, end-of-period managed loans were
$162.1 billion. The increases in both average
managed loans and end-of-period managed loans were
predominantly due to the impact of the Washington
Mutual transaction and organic portfolio growth.

Managed total net revenue was $16.5 billion, an
increase of $1.2 billion, or 8%, from the prior
year. Net interest income was $13.8 billion, up
$1.6 billion, or 13%, from the prior year, driven
by the Washington Mutual transaction, higher
average managed loan balances, and wider loan
spreads. These benefits were offset partially by
the effect of higher revenue reversals associated
with higher charge-offs. Noninterest revenue was
$2.7 billion, a decrease of $327 million, or 11%,
from the prior year, driven by increased rewards
expense, lower securitization income driven by
higher credit losses, and higher volume-driven
payments to partners; these were largely offset by
increased interchange income, benefiting from a 4%
increase in charge volume, as well as the impact of
the Washington Mutual transaction.

The managed provision for credit losses was $10.1
billion, an increase of $4.3 billion, or 76%, from
the prior year, due to an increase of $1.7 billion
in the allowance for loan losses and a higher level
of charge-offs. The managed net charge-off rate
increased to
5.01%, up from 3.68% in the prior year. The 30-day
managed delinquency rate was 4.97%, up from 3.48%
in the prior year. Excluding Washington Mutual, the
managed net charge-off rate was 4.92% and the
30-day delinquency rate was 4.36%.

Noninterest expense was $5.1 billion, an increase
of $226 million, or 5%, from the prior year,
predominantly due to the impact of the Washington
Mutual transaction.

2007 compared with 2006
Net income of $2.9 billion was down $287 million,
or 9%, from the prior year. Prior-year results
benefited from significantly lower net charge-offs
following the
change in bankruptcy legislation in the fourth
quarter of 2005. The increase in net charge-offs
was offset partially by higher revenue.

End-of-period managed loans of $157.1 billion
increased $4.2 billion, or 3%, from the prior year.
Average managed loans of $149.3 billion increased
$8.2 billion, or 6%, from the prior year. The
increases in both end-of-period and average managed
loans resulted from organic growth.

Managed total net revenue was $15.2 billion, an
increase of $490 million, or 3%, from the prior
year. Net interest income was $12.2 billion, up
$388 million, or 3%, from the prior year. The
increase in net interest income was driven by a
higher level of fees and higher average loan
balances. These benefits were offset partially by
narrower loan spreads, the discontinuation of
certain billing practices (including the
elimination of certain over-limit fees and the
two-cycle billing method for calculating finance
charges beginning in the second quarter of 2007)
and the effect of higher revenue reversals
associated

with higher charge-offs. Noninterest
revenue was $3.0 billion, an increase of $102
million, or 3%, from the prior year. The increase
reflected a higher level of fee-based revenue and
increased net interchange income, which benefited
from higher charge volume. Charge volume growth was
4%, reflecting a 9% increase in sales volume,
offset primarily by a lower level of balance
transfers, the result of more targeted marketing
efforts.

The managed provision for credit losses was $5.7
billion, an increase of $1.1 billion, or 24%, from
the prior year. The increase was primarily due to a
higher level of net charge-offs (the prior year
benefited from the change in bankruptcy legislation
in the fourth quarter of 2005) and an increase in
the allowance for loan losses, driven by higher
estimated net charge-offs in the portfolio. The
managed net charge-off rate was 3.68%, up from
3.33% in the prior year. The 30-day managed
delinquency rate was 3.48%, up from 3.13% in the
prior year.

Noninterest expense was $4.9 billion, a decrease of
$172 million, or 3%, compared with the prior year,
primarily due to lower marketing expense and lower
fraud-related expense, partially offset by higher
volume-related expense.

The following are brief descriptions of selected business metrics within Card Services.

Results for 2008 included approximately 13
million credit card accounts acquired in the
Washington Mutual transaction. Results for 2006
included approximately 30 million accounts from
loan portfolio acquisitions.

On September 25, 2008, JPMorgan Chase acquired the
banking operations of Washington Mutual from the
FDIC, adding approximately $44.5 billion in loans
to the Commercial Term Lending, Real Estate
Banking and Other businesses in Commercial
Banking. On October 1, 2006, JPMorgan Chase
completed the acquisition of The Bank of New
York’s consumer, business banking and
middle-market banking businesses, adding
approximately $2.3 billion in loans and
$1.2 billion in deposits in Commercial Banking.

Selected income statement data

Year ended December 31,

(in millions, except ratios)

2008

2007

2006

Revenue

Lending & deposit-related fees

$

854

$

647

$

589

Asset management, administration
and commissions

113

92

67

All other income(a)

514

524

417

Noninterest revenue

1,481

1,263

1,073

Net interest income

3,296

2,840

2,727

Total net revenue

4,777

4,103

3,800

Provision for credit losses

464

279

160

Noninterest expense

Compensation expense

692

706

740

Noncompensation expense

1,206

1,197

1,179

Amortization of intangibles

48

55

60

Total noninterest expense

1,946

1,958

1,979

Income before income tax expense

2,367

1,866

1,661

Income tax expense

928

732

651

Net income

$

1,439

$

1,134

$

1,010

Financial ratios

ROE

20

%

17

%

18

%

Overhead ratio

41

48

52

(a)

Revenue from investment banking products sold to CB clients and commercial card
revenue is included in all other income.

2008 compared with 2007
Net income was $1.4 billion, an increase of $305
million, or 27%, from the prior year, due to
growth in total net revenue including the impact
of the Washington Mutual transaction, partially
offset by a higher provision for credit losses.

Record total net revenue of $4.8 billion increased
$674 million, or 16%. Net interest income of $3.3
billion increased $456 million, or 16%, driven by
double-digit growth in liability and loan balances
and the impact of the Washington Mutual
transaction, partially offset by spread compression
in the liability and loan portfolios. Noninterest
revenue was $1.5 billion, up $218 million, or 17%,
due to higher deposit and lending-related fees.

On a client segment basis, Middle Market Banking
revenue was $2.9 billion, an increase of $250
million, or 9%, from the prior year due
predominantly to higher deposit-related fees and
growth in liability and loan balances. Revenue from
Commercial Term Lending, a new client segment
established as a result of the Washington Mutual
transaction encompassing multi-family and
commercial mortgage loans, was $243 million.
Mid-Corporate Banking revenue was $921 million, an
increase of $106 million, or 13%, reflecting higher
loan balances, investment banking revenue, and
deposit-related fees. Real Estate Banking revenue
of $413 million decreased $8 million, or 2%.

Provision for credit losses was $464 million, an
increase of $185 million, or 66%, compared with the
prior year, reflecting a weakening credit
environment and loan growth. Net charge-offs were
$288 million (0.35% net charge-off rate), compared
with $44 million (0.07% net charge-off rate) in the
prior year, predominantly related to an increase in
real estate charge-offs. The allowance for loan
losses increased $1.1 billion, which primarily
reflected the impact of the Washington Mutual
transaction. Nonperforming assets were $1.1
billion, an increase of $1.0 billion compared with
the prior year, predominantly reflecting the
Washington Mutual transaction and higher real
estate-related balances.

Noninterest expense was $1.9 billion, a decrease of
$12 million, or 1%, from the prior year, due to
lower performance-based incentive compensation and
volume-based charges from service providers,
predominantly offset by the impact of the
Washington Mutual transaction.

2007 compared with 2006
Net income was $1.1 billion, an increase of $124
million, or 12%, from the prior year due primarily
to growth in total net revenue, partially offset by
higher provision for credit losses.

Record total net revenue of $4.1 billion increased $303 million, or
8%. Net interest income of $2.8 billion increased
$113 million, or 4%, driven by double-digit growth
in liability balances and loans, which reflected
organic growth and the Bank of New York
transaction, largely offset by the continued shift
to narrower-spread liability products and spread
compression in the loan and liability portfolios.
Noninterest revenue was $1.3 billion, up $190
million, or 18%, due to increased deposit-related
fees, higher investment banking revenue, and gains
on sales of securities acquired in the satisfaction
of debt.

On a segment basis, Middle Market Banking revenue
was $2.7 billion, an increase of $154 million, or
6%, primarily due to the Bank of New York
transaction, higher deposit-related fees and growth
in investment banking revenue. Mid-Corporate
Banking revenue was $815 million, an increase of
$159 million, or 24%, reflecting higher

lending revenue, investment banking revenue,
and gains on sales of securities acquired in the
satisfaction of debt. Real Estate Banking revenue
of $421 million decreased $37 million, or 8%.

Provision for credit losses was $279 million,
compared with $160 million in the prior year. The
increase in the allowance for credit losses
reflected portfolio activity including slightly
lower credit quality as well as growth in loan
balances. The allowance for loan losses to average
loans retained was 2.81%, compared with 2.86% in
the prior year.

Noninterest expense was $2.0 billion, a decrease
of $21 million, or 1%, largely due to lower
compensation expense driven by the absence of
prior-year expense from the adoption of SFAS 123R,
partially offset by expense growth related to the
Bank of New York transaction.

Selected metrics

Year ended December 31,

(in millions, except

headcount)

2008

2007

2006

Revenue by product:

Lending

$

1,743

$

1,419

$

1,344

Treasury services

2,648

2,350

2,243

Investment banking

334

292

253

Other

52

42

(40

)

Total Commercial Banking
revenue

$

4,777

$

4,103

$

3,800

IB revenue, gross(a)

$

966

$

888

$

716

Revenue by business:

Middle Market Banking

$

2,939

$

2,689

$

2,535

Commercial Term Lending(b)

243

—

—

Mid-Corporate Banking

921

815

656

Real Estate Banking(b)

413

421

458

Other(b)

261

178

151

Total Commercial Banking
revenue

$

4,777

$

4,103

$

3,800

Selected balance sheet data
(period-end)

Equity

$

8,000

$

6,700

$

6,300

Selected balance sheet data
(average)

Total assets

$

114,299

$

87,140

$

57,754

Loans:

Loans retained

81,931

60,231

53,154

Loans held-for-sale and loans at
fair value

406

863

442

Total loans

$

82,337

$

61,094

$

53,596

Liability balances(c)

103,121

87,726

73,613

Equity

$

7,251

$

6,502

$

5,702

Average loans by business:

Middle Market Banking

$

42,193

$

37,333

$

33,225

Commercial Term Lending(b)

9,310

—

—

Mid-Corporate Banking

16,297

12,481

8,632

Real Estate Banking(b)

9,008

7,116

7,566

Other(b)

5,529

4,164

4,173

Total Commercial Banking
loans

$

82,337

$

61,094

$

53,596

Headcount

5,206

4,125

4,459

Year ended December 31,

(in millions, except ratios)

2008

2007

2006

Credit data and quality
statistics:

Net charge-offs

$

288

$

44

$

27

Nonperforming loans(d)

1,026

146

121

Nonperforming assets

1,142

148

122

Allowance for credit losses:

Allowance for loan losses(e)

2,826

1,695

1,519

Allowance for lending-related
commitments

206

236

187

Total allowance for credit losses

3,032

1,931

1,706

Net charge-off rate(f)

0.35

%

0.07

%

0.05

%

Allowance for loan losses to average loans(d)(f)

3.04

(g)

2.81

2.86

Allowance for loan losses to
nonperforming
loans(d)

275

1,161

1,255

Nonperforming loans to average loans(d)

1.10

(g)

0.24

0.23

(a)

Represents the total revenue related to investment banking products sold to CB
clients.

(b)

Results for 2008 include total net revenue and average loans acquired in the
Washington Mutual transaction.

(c)

Liability balances include deposits and deposits swept to on-balance sheet
liabilities such as commercial paper, federal funds purchased and securities loaned or
sold under repurchase agreements.

(d)

Purchased credit-impaired wholesale loans accounted for under SOP 03-3 that were
acquired in the Washington Mutual transaction are considered nonperforming loans because
the timing and amount of expected cash flows are not reasonably estimable.
These nonperforming loans were included when calculating the allowance coverage ratio, the
allowance for loan losses to nonperforming loans ratio, and the nonperforming loans to
average loans ratio. The carrying amount of these purchased credit- impaired loans was $224
million at December 31, 2008.

(e)

Beginning in 2008, the allowance for loan losses included an amount related to
loans acquired in the Washington Mutual transaction and the Bear Stearns merger.

(f)

Loans held-for-sale and loans accounted for at fair value were excluded when
calculating the allowance coverage ratio and the net charge-off rate.

(g)

The September 30, 2008, ending loan balance of $44.5 billion
acquired in the Washington Mutual transaction is treated as if it had
been part of the loan balance for the entire third quarter of 2008.

TSS is a global leader in transaction, investment and information services. TSS is one of the
world’s largest cash management providers and a leading global custodian. TS provides cash
management, trade, wholesale card and liquidity products and services to small and mid-sized
companies, multinational corporations, financial institutions and government entities. TS partners
with the Commercial Banking, Retail Financial Services and Asset Management businesses to serve
clients firmwide. As a result, certain TS revenue is included in other segments’ results. WSS
holds, values, clears and services securities, cash and alternative investments for investors and
broker-dealers, and manages depositary receipt programs globally.

As a result of the transaction with the Bank of New York on October1, 2006, selected corporate trust businesses were transferred from TSS to the Corporate/Private
Equity segment and are reported in discontinued operations.

Selected income statement data

Year ended December 31,

(in millions, except ratio data)

2008

2007

2006

Revenue

Lending & deposit-related fees

$

1,146

$

923

$

735

Asset management, administration

and commissions

3,133

3,050

2,692

All other income

917

708

612

Noninterest revenue

5,196

4,681

4,039

Net interest income

2,938

2,264

2,070

Total net revenue

8,134

6,945

6,109

Provision for credit losses

82

19

(1

)

Credit reimbursement to IB(a)

(121

)

(121

)

(121

)

Noninterest expense

Compensation expense

2,602

2,353

2,198

Noncompensation expense

2,556

2,161

1,995

Amortization of intangibles

65

66

73

Total noninterest expense

5,223

4,580

4,266

Income before income tax
expense

2,708

2,225

1,723

Income tax expense

941

828

633

Net income

$

1,767

$

1,397

$

1,090

Revenue by business

Treasury Services

$

3,555

$

3,013

$

2,792

Worldwide Securities Services

4,579

3,932

3,317

Total net revenue

$

8,134

$

6,945

$

6,109

Financial ratios

ROE

47

%

47

%

48

%

Overhead ratio

64

66

70

Pretax margin ratio(b)

33

32

28

Year ended December 31,

(in millions, except headcount)

2008

2007

2006

Selected balance sheet data
(period-end)

Equity

$

4,500

$

3,000

$

2,200

Selected balance sheet data
(average)

Total assets

$

54,563

$

53,350

$

31,760

Loans(c)

26,226

20,821

15,564

Liability balances(d)

279,833

228,925

189,540

Equity

3,751

3,000

2,285

Headcount

27,070

25,669

25,423

(a)

TSS is charged a credit reimbursement related to certain exposures managed within IB
credit portfolio on behalf of clients shared with TSS. Beginning in first quarter 2009, income
statement and balance sheet items for credit portfolio activity related to joint IB/TSS
clients will be reflected proportionally in the respective IB and TSS financials. This will
replace the previous approach whereby a credit reimbursement was charged to TSS by IB.

(b)

Pretax margin represents income before income tax expense divided by total net
revenue, which is a measure of pretax performance and another basis by which management
evaluates its performance and that of its competitors.

Liability balances include deposits and deposits swept to on-balance sheet liabilities
such as commercial paper, federal funds purchased and securities loaned or sold under
repurchase agreements.

2008 compared with 2007
Net income was a record $1.8 billion, an increase of $370 million, or 26%, from the prior year,
driven by higher total net revenue. This increase was largely offset by higher noninterest expense.

Total net revenue was a record $8.1 billion, an increase of $1.2 billion, or 17%, from the prior
year. Worldwide Securities Services posted record net revenue of $4.6 billion, an increase of $647
million, or 16%, from the prior year. The growth was driven by wider spreads in securities lending,
foreign exchange and liability products, increased product usage by new and existing clients
(largely in custody, fund services, alternative investment services and depositary receipts) and
higher liability balances, reflecting increased client deposit activity resulting from recent
market conditions. These benefits were offset partially by market depreciation. Treasury Services
posted record net revenue of $3.6 billion, an increase of $542 million, or 18%, reflecting higher
liability balances and volume growth in electronic funds transfer products and trade loans. Revenue
growth from higher liability balances reflects increased client deposit activity resulting from
recent market conditions as well as organic growth. TSS firmwide net revenue, which includes
Treasury Services net revenue recorded in other lines of business, grew to $11.1 billion, an
increase of $1.5 billion, or 16%. Treasury Services firmwide net revenue grew to $6.5 billion, an
increase of $869 million, or 15%.

Noninterest expense was $5.2 billion, an increase of $643 million, or 14%, from the prior year,
reflecting higher expense related to business and volume growth as well as continued investment in
new product platforms.

2007 compared with 2006
Net income was a record $1.4 billion, an increase of $307 million, or 28%, from the prior year,
driven by record total net revenue, partially offset by higher noninterest expense.

Total net revenue was $6.9 billion, an increase of $836 million, or 14%, from the prior year.
Worldwide Securities Services net revenue of $3.9 billion was up $615 million, or 19%. The growth
was driven by increased product usage by new and existing clients (primarily custody, securities
lending, depositary receipts and fund services), market appreciation on assets under custody, and
wider spreads on securities lending. These gains were offset partially by spread compression on
liability products. Treasury Services net revenue was $3.0 billion, an increase of $221 million, or
8%, from the prior year. The results were driven by growth in electronic transaction volumes and
higher liability balances, offset partially by a shift to narrower-spread liability products. TSS
firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of
business, grew to $9.6 billion, up
$1.0 billion, or 12%. Treasury Services firmwide net revenue grew to
$5.6 billion, up $391 million, or 7%.

Noninterest expense was $4.6 billion, an increase of $314 million, or 7%, from the prior year,
reflecting higher expense related to business and volume growth, as well as investment in new
product platforms.

Treasury & Securities Services firmwide metrics include revenue recorded in the CB, Retail Banking
and AM lines of business and excludes foreign exchange (“FX”) revenue recorded in IB for
TSS-related FX activity. In order to capture the firmwide impact of TS and TSS products and
revenue, management reviews firmwide metrics such as liability balances, revenue and overhead
ratios in assessing financial performance for TSS. Firmwide metrics are necessary in order to
understand the aggregate TSS business.

TSS firmwide FX revenue, which includes FX revenue recorded in TSS and FX revenue
associated with TSS customers who are FX customers of IB, was $880 million, $552 million and
$445 million for the years ended December 31, 2008, 2007 and 2006, respectively.

(b)

Firmwide liability balances include TS’ liability balances recorded in the Commercial
Banking line of business.

(c)

Overhead ratios have been calculated based upon firmwide revenue and TSS and TS
expense, respectively, including those allocated to certain other lines of business. FX
revenue and expense recorded in IB for TSS-related FX activity are not included in this ratio.

AM, with assets under supervision of $1.5 trillion, is a global leader in investment and wealth
management. AM clients include institutions, retail investors and high-net-worth individuals in
every major market throughout the world. AM offers global investment management in equities, fixed
income, real estate, hedge funds, private equity and liquidity, including money market instruments
and bank deposits. AM also provides trust and estate, banking and brokerage services to
high-net-worth clients, and retirement services for corporations and individuals. The majority of
AM’s client assets are in actively managed portfolios.

On May 30, 2008, JPMorgan Chase merged with The Bear Stearns Companies, Inc. The merger resulted in
the addition of a new client segment, Bear Stearns Brokerage, but did not materially affect
balances or business metrics.

Selected income statement data

Year ended December 31,

(in millions, except ratios)

2008

2007

2006

Revenue

Asset management, administration
and commissions

$

6,004

$

6,821

$

5,295

All other income

62

654

521

Noninterest revenue

6,066

7,475

5,816

Net interest income

1,518

1,160

971

Total net revenue

7,584

8,635

6,787

Provision for credit losses

85

(18

)

(28

)

Noninterest expense

Compensation expense

3,216

3,521

2,777

Noncompensation expense

2,000

1,915

1,713

Amortization of intangibles

82

79

88

Total noninterest expense

5,298

5,515

4,578

Income before income tax
expense

2,201

3,138

2,237

Income tax expense

844

1,172

828

Net income

$

1,357

$

1,966

$

1,409

Revenue by client segment

Private Bank(a)

$

2,565

$

2,362

$

1,686

Institutional

1,775

2,525

1,972

Retail

1,620

2,408

1,885

Private Wealth Management(a)

1,387

1,340

1,244

Bear Stearns
Brokerage

237

—

—

Total net revenue

$

7,584

$

8,635

$

6,787

Financial ratios

ROE

24

%

51

%

40

%

Overhead ratio

70

64

67

Pretax margin ratio(b)

29

36

33

(a)

In 2008, certain clients were transferred from Private Bank to Private Wealth
Management. Prior periods have been revised to conform to this change.

(b)

Pretax margin represents income before income tax expense divided by total net
revenue, which is a measure of pretax performance and another basis by which management
evaluates its performance and that of its competitors.

2008 compared with 2007
Net income was $1.4 billion, a decline of $609 million, or 31%, from the prior year, driven by
lower total net revenue offset partially by lower noninterest expense.

Total net revenue was $7.6 billion, a decrease of $1.1 billion, or 12%, from the prior year.
Noninterest revenue was $6.1 billion, a decline of $1.4 billion, or 19%, due to lower performance
fees and the effect of lower markets, including the impact of lower market valuations of seed
capital investments. The lower results were offset partially by the benefit of the Bear Stearns
merger and increased revenue from net asset inflows. Net interest income was $1.5 billion, up $358
million, or 31%, from the prior year, due to higher deposit and loan balances and wider deposit
spreads.

The provision for credit losses was $85 million, compared with a benefit of $18 million in the
prior year, reflecting an increase in loan balances, higher net charge-offs and a weakening credit
environment.

Noninterest expense was $5.3 billion, down $217 million, or 4%, compared with the prior year due to
lower performance-based compensation, largely offset by the effect of the Bear Stearns merger and
higher compensation expense resulting from increased average headcount.

2007 compared with 2006
Net income was a record $2.0 billion, an increase of $557 million, or 40%, from the prior year.
Results benefited from record total net revenue, partially offset by higher noninterest expense.

Total net revenue was $8.6 billion, an increase of $1.8 billion, or 27%, from the prior year.
Noninterest revenue, primarily fees and commissions, was $7.5 billion, up $1.7 billion, or 29%,
largely due to increased assets under management and higher performance and placement fees. Net
interest income was $1.2 billion, up $189 million, or 19%, from the prior year, largely due to
higher deposit and loan balances.

The provision for credit losses was a benefit of $18 million, compared with a benefit of $28
million in the prior year.

Noninterest expense was $5.5 billion, an increase of $937 million, or 20%, from the prior year. The
increase was due primarily to higher performance-based compensation expense and investments in all
business segments.

Selected metrics

Year ended December 31,

(in millions, except headcount, ranking

data, and where otherwise noted)

2008

2007

2006

Business metrics

Number of:

Client advisors

1,705

1,729

1,506

Retirement planning services
participants

1,531,000

1,501,000

1,362,000

Bear Stearns brokers

324

—

—

% of customer assets in 4 & 5 Star
Funds(a)

42

%

55

%

58

%

% of AUM in 1st and 2nd quartiles:(b)

1 year

54

%

57

%

83

%

3 years

65

%

75

%

77

%

5 years

76

%

76

%

79

%

Selected balance sheet data
(period-end)

Equity

$

7,000

$

4,000

$

3,500

Selected balance sheet data
(average)

Total assets

$

65,550

$

51,882

$

43,635

Loans(c)

38,124

29,496

26,507

Deposits

70,179

58,863

50,607

Equity

5,645

3,876

3,500

Headcount

15,339

14,799

13,298

Credit data and quality
statistics

Net charge-offs (recoveries)

$

11

$

(8

)

$

(19

)

Nonperforming loans

147

12

39

Allowance for loan losses

191

112

121

Allowance for lending-related
commitments

5

7

6

Net charge-off (recovery) rate

0.03

%

(0.03

)%

(0.07

)%

Allowance for loan losses to
average loans

0.50

0.38

0.46

Allowance for loan losses to
nonperforming loans

130

933

310

Nonperforming loans to average loans

0.39

0.04

0.15

(a)

Derived from following rating services: Morningstar for the United States; Micropal
for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan.

(b)

Derived from following rating services: Lipper for the United States and Taiwan;
Micropal for the United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan.

(c)

Reflects the transfer in 2007 of held-for-investment prime mortgage loans transferred
from AM to Corporate within the Corporate/Private Equity segment.

J.P.
Morgan Asset Management has established two measures of its overall performance.

•

Percentage of assets under management in funds rated 4 and 5 stars (3 year). Mutual fund
rating services rank funds based on their risk-adjusted performance over various periods. A 5
star rating is the best and represents the top 10% of industry wide ranked funds. A 4 star
rating represents the next 22% of industry wide ranked funds. The worst rating is a 1 star
rating.

•

Percentage of assets under management in first- or second- quartile funds (one, three
and five years). Mutual fund rating services rank funds according to a peer-based performance
system, which measures returns according to specific time and fund classification (small, mid,
multi and large cap).

2008 compared with 2007
Assets under supervision (“AUS”) were $1.5 trillion, a decrease of $76 billion, or 5%, from the prior year.
Assets under management (“AUM”) were $1.1 trillion, down $60 billion, or 5%, from the prior year. The
decrease was due to the effect of lower markets and non-liquidity outflows, predominantly offset by
liquidity product inflows across all segments and the addition of Bear Stearns assets under
management. Custody, brokerage,
administration and deposit balances were $363 billion, down $16 billion due to the effect of lower
markets on brokerage and custody balances, offset by the addition of Bear Stearns Brokerage. The
Firm also has a 43% interest in American Century Companies, Inc., whose AUM totaled $70 billion and
$102 billion at December 31, 2008 and 2007, respectively, which are excluded from the AUM above.

2007 compared with 2006
AUS were $1.6 trillion, an increase of $225 billion, or 17%, from the
prior year. AUM were $1.2 trillion, up 18%, or $180 billion, from the
prior year. The increase in AUM was the result of net asset inflows into liquidity and alternative
products and market appreciation across all segments. Custody, brokerage, administration and
deposit balances were $379 billion, up $45 billion. The Firm also has a 44% interest in American
Century Companies, Inc., whose AUM totaled $102 billion and $103 billion at December 31, 2007 and
2006, respectively, which are excluded from the AUM above.

Assets under supervision(a)

As of or for the year

ended December 31, (in billions)

2008

2007

2006

Assets by asset class

Liquidity

$

613

$

400

$

311

Fixed income

180

200

175

Equities & balanced

240

472

427

Alternatives

100

121

100

Total assets under
management

1,133

1,193

1,013

Custody/brokerage/

administration/deposits

363

379

334

Total assets under supervision

$

1,496

$

1,572

$

1,347

Assets by client segment

Institutional

$

681

$

632

$

538

Private Bank(b)

181

183

142

Retail

194

300

259

Private Wealth Management(b)

71

78

74

Bear Stearns Brokerage

6

—

—

Total assets under management

$

1,133

$

1,193

$

1,013

Institutional

$

682

$

633

$

539

Private Bank(b)

378

403

328

Retail

262

394

343

Private Wealth Management(b)

124

142

137

Bear Stearns Brokerage

50

—

—

Total assets under supervision

$

1,496

$

1,572

$

1,347

Assets by geographic region

As of or for the year

ended December 31, (in billions)

2008

2007

2006

U.S./Canada

$

798

$

760

$

630

International

335

433

383

Total assets under management

$

1,133

$

1,193

$

1,013

U.S./Canada

$

1,084

$

1,032

$

889

International

412

540

458

Total assets under supervision

$

1,496

$

1,572

$

1,347

Mutual fund assets by asset class

Liquidity

$

553

$

339

$

255

Fixed income

41

46

46

Equities

99

224

206

Total mutual fund assets

$

693

$

609

$

507

Assets under management
rollforward

Beginning balance, January 1

$

1,193

$

1,013

$

847

Net asset flows:

Liquidity

210

78

44

Fixed income

(12

)

9

11

Equities, balanced and alternative

(47

)

28

34

Market/performance/other impacts(c)

(211

)

65

77

Ending balance, December 31

$

1,133

$

1,193

$

1,013

Assets under supervision
rollforward

Beginning balance, January 1

$

1,572

$

1,347

$

1,149

Net asset flows

181

143

102

Market/performance/other impacts(c)

(257

)

82

96

Ending balance, December 31

$

1,496

$

1,572

$

1,347

(a)

Excludes assets under management of American Century Companies, Inc., in which the
Firm had a 43%, 44% and 43% ownership at December 31, 2008, 2007 and 2006, respectively.

(b)

In 2008, certain clients were transferred from Private Bank to Private Wealth
Management. Prior periods have been revised to conform to this change.

(c)

Includes $15 billion for assets under management and $68 billion for assets under
supervision from the Bear Stearns merger in the second quarter of 2008.

Income (loss) from continuing
operations before income
tax expense (benefit)

(1,884

)

2,673

(1,132

)

Income tax expense (benefit)(g)

(535

)

788

(1,179

)

Income (loss) from continuing
operations

(1,349

)

1,885

47

Income from discontinued
operations(h)

—

—

795

Income before extraordinary gain

(1,349

)

1,885

842

Extraordinary gain(i)

1,906

—

—

Net income

$

557

$

1,885

$

842

(a)

Included losses on preferred equity interests in Fannie Mae and Freddie Mac in
2008.

(b)

The Firm adopted SFAS 157 in the first quarter of 2007. See Note 4 on pages
129–143 of this Annual Report for additional information.

(c)

Included gain on sale of MasterCard shares in 2008.

(d)

Included a gain from the dissolution of the Chase Paymentech Solutions joint
venture and proceeds from the sale of Visa shares in its initial public offering in 2008.

(e)

Represents an accounting conformity loan loss reserve provision related to the
acquisition of Washington Mutual Bank’s banking operations. For a further discussion, see
Consumer Credit Portfolio on page 99 of this Annual Report.

(f)

Included a release of credit card litigation reserves in 2008 and insurance
recoveries related to settlement of the Enron and WorldCom class action litigations and
for certain other material legal proceedings of $512 million for full year 2006.

(g)

Includes tax benefits recognized upon resolution of tax audits.

(h)

Included a $622 million gain from the sale of selected corporate trust businesses
in 2006.

(i)

Effective September 25, 2008, JPMorgan Chase acquired Washington Mutual’s banking
operations from the FDIC for $1.9 billion. The fair value of the Washington Mutual net
assets acquired exceeded the purchase price, which resulted in negative goodwill. In
accordance with SFAS 141, nonfinancial assets that are not held-for-sale were written
down against that negative goodwill. The negative goodwill that remained after writing
down nonfinancial assets was recognized as an extraordinary gain in 2008.

(j)

In November 2008, the Firm transferred $5.8 billion of higher quality credit card
loans from the legacy Chase portfolio to a securitization trust previously established by
Washington Mutual (“the Trust”). As a result of converting higher credit quality
Chase-originated on-book receivables to the Trust’s seller’s interest which has a higher
overall loss rate reflective of the total assets within the Trust, approximately $400
million of incremental provision expense was recorded during the fourth quarter. This
incremental provision expense was recorded in the Corporate segment as the action related
to the acquisition of Washington Mutual’s banking operations. For further discussion of
credit card securitizations, see Note 16 on pages 169–170 of this Annual Report.

(k)

Includes $9 million for credit card securitizations related to the Washington
Mutual transaction.

2008 compared with 2007
Net income for Corporate/Private Equity was $557
million, compared with net income of $1.9 billion
in the prior year. This segment includes the
results of Private Equity and Corporate business
segments, as well as merger-related items.

Net loss for Private Equity was $690 million,
compared with net income of $2.2 billion in the
prior year. Net revenue was negative $963
million, a decrease of $4.9 billion, reflecting
Private Equity losses of $894 million, compared
with gains of $4.1 billion in the prior year.
Noninterest expense was negative $120 million, a
decrease of $469 million from the prior year,
reflecting lower compensation expense.

Net income for Corporate was $1.5 billion, compared
with a net loss of $150 million in the prior year.
Net revenue was $1.0 billion, an increase of $580
million. Excluding merger-related items, net
revenue was $1.7 billion, an increase of $1.2
billion. Net revenue included a gain of $1.5
billion on the proceeds from the sale of Visa
shares in its initial public offering, $1.0 billion
on the dissolution of the Chase Paymentech
Solutions joint venture, and $668 million from the
sale of MasterCard shares, partially offset by
losses of $1.1 billion on preferred securities of
Fannie Mae and Freddie Mac and $464 million related
to the offer to repurchase auction-rate securities.
2007 included a gain of $234 million on the sale of
MasterCard shares.
Noninterest expense was negative $736 million,
compared with $959 million in the prior year,
driven mainly by lower litigation expense.

Merger-related items were a net loss of $2.1
billion
compared with a net loss of $130 million in the
prior year. Washington Mutual merger-related items
included conforming loan loss reserve of $1.5
billion, credit card related loan loss reserves of
$403 million and net merger-related costs of $138
million. Bear Stearns merger-related included a net
loss of $423 million, which represented JPMorgan
Chase’s
49.4% ownership in Bear Stearns losses from April
8 to May 30, 2008, and net merger-related costs
of $665 million. 2007 included merger costs of
$209 million related to the Bank One and Bank of
New York transactions.

2007 compared with 2006
Net income was $1.9 billion, compared with $842
million in the prior year, benefiting from strong
Private Equity gains, partially offset by higher
expense. Prior-year results also included Income
from discontinued operations of $795 million, which
included a one-time gain of $622 million from the
sale of selected corporate trust businesses.

Net income for Private Equity was $2.2 billion,
compared with $627 million in the prior year.
Total net revenue was $4.0 billion, an increase of
$2.8 billion. The increase was driven by Private
Equity gains of $4.1 billion, compared with $1.3
billion, reflecting a higher level of gains and
the change in classification of carried interest
to compensation expense. Total noninterest expense
was $589 million, an increase of $422 million from
the prior year. The increase was driven by higher
compensation expense, reflecting the change in the
classification of carried interest.

Net loss for Corporate was $150 million, compared
with a net loss of $391 million in the prior year.
Corporate total net revenue was $452 million, an
increase of $1.6 billion. Revenue benefited from
net security gains compared with net security
losses in the prior year and improved net interest
spread. Total noninterest expense was $959 million,
an increase of $284 million from the prior year.
The increase reflected higher net litigation
expense, driven by credit card-related litigation
and the absence of prior-year insurance recoveries
related to certain material litigation, partially
offset by lower compensation expense.

Net loss for merger costs related to the Bank One
and the Bank of New York transactions were $130
million, compared with a loss of $189 million in
the prior year. Merger costs were $209 million,
compared with $305 million in the prior year.

Selected metrics

Year ended December 31,

(in millions, except headcount)

2008

2007

2006

Total net revenue

Private equity(a)

$

(963

)

$

3,967

$

1,142

Corporate

1,032

452

(1,128

)

Total net revenue

$

69

$

4,419

$

14

Net
income (loss)

Private equity(a)

$

(690

)

$

2,165

$

627

Corporate(b)(c)

1,458

(150

)

(391

)

Merger-related items(d)

(2,117

)

(130

)

(189

)

Income (loss) from continuing
operations

(1,349

)

1,885

47

Income from discontinued
operations (after-tax)(e)

—

—

795

Income before extraordinary gain

(1,349

)

1,885

842

Extraordinary gain

1,906

—

—

Total net income

$

557

$

1,885

$

842

Headcount

23,376

22,512

23,242

(a)

The Firm adopted SFAS 157 in the first quarter of 2007. See Note 4 on pages
129–143 of this Annual Report for additional information.

(b)

Included a release of credit card litigation reserves in 2008 and insurance
recoveries related to settlement of the Enron and WorldCom class action litigations and
for certain other material legal proceedings of $512 million for full year 2006.

(c)

Includes tax benefits recognized upon resolution of tax audits.

(d)

Includes an accounting conformity loan loss reserve provision related to the
Washington Mutual transaction in 2008. 2008 also reflects items related to the Bear Stearns
merger, which included Bear Stearns’ losses, merger costs, Bear Stearns asset management
liquidation costs and Bear Stearns private client services broker retention expense. Prior
periods represent costs related to the Bank One transaction in 2004 and the Bank of New
York transaction in 2006.

(e)

Included a $622 million gain from the sale of selected corporate trust business in
2006.

2008 compared with 2007
The carrying value of the private equity portfolio
at December 31, 2008, was $6.9 billion, down from
$7.2 billion at December 31, 2007. The portfolio
decrease was primarily driven by unfavorable
valuation adjustments on existing investments,
partially offset by new investments, and the
addition of the Bear Stearns portfolios. The
portfolio represented 5.8% of the Firm’s
stockholders’ equity less goodwill at December 31,2008, down from 9.2% at December 31, 2007.

2007 compared with 2006
The carrying value of the private equity portfolio
at December 31, 2007, was $7.2 billion, up from
$6.1 billion at December 31, 2006. The portfolio
increase was due primarily to favorable valuation
adjustments on nonpublic investments and new
investments, partially offset by sales activity.
The portfolio represented 9.2% of the Firm’s
stockholders’ equity less goodwill at December 31,2007, up from
8.6% at December 31, 2006.

Selected income statement and balance sheet data

Year ended December 31,

(in millions)

2008

2007

2006

Corporate

Securities gains (losses)(a)

$

1,652

$

37

$

(619

)

Investment securities portfolio
(average)(b)

106,801

85,517

63,361

Investment
securities portfolio (ending)(b)

166,662

76,200

82,091

Mortgage loans (average)(c)

7,059

5,639

—

Mortgage loans (ending)(c)

7,292

6,635

—

Private equity

Realized gains

$

1,717

$

2,312

$

1,223

Unrealized gains (losses)(d)(e)

(2,480

)

1,607

(1

)

Total direct investments

(763

)

3,919

1,222

Third-party fund investments

(131

)

165

77

Total private equity gains
(losses)(f)

$

(894

)

$

4,084

$

1,299

Private equity portfolio
information(g)

Direct investments

Publicly held securities

Carrying value

$

483

$

390

$

587

Cost

792

288

451

Quoted public value

543

536

831

Privately held direct securities

Carrying value

5,564

5,914

4,692

Cost

6,296

4,867

5,795

Third-party fund investments(h)

Carrying value

805

849

802

Cost

1,169

1,076

1,080

Total private equity
portfolio – Carrying value

$

6,852

$

7,153

$

6,081

Total private equity portfolio – Cost

$

8,257

$

6,231

$

7,326

(a)

Results for 2008 included a gain on the sale of MasterCard shares. All periods
reflect repositioning of the Corporate investment securities portfolio and exclude
gains/losses on securities used to manage risk associated with MSRs.

(b)

Includes Chief Investment Office investment securities only.

(c)

Held-for-investment prime mortgage loans were transferred from AM to the
Corporate/Private Equity segment for risk management and reporting purposes. The initial
transfer in 2007 had no material impact on the financial results of Corporate/Private
Equity.

(d)

Unrealized gains (losses) contain reversals of unrealized gains and losses that
were recognized in prior periods and have now been realized.

(e)

The Firm adopted SFAS 157 in the first quarter of 2007. For additional
information, see Note 4 on pages 129–143 of this Annual Report.

(f)

Included in principal transactions revenue in the Consolidated Statements of
Income.

(g)

For more information on the Firm’s policies regarding the valuation of the private
equity portfolio, see Note 4 on pages 129–143 of this Annual Report.

(h)

Unfunded commitments to third-party equity funds were $1.4 billion, $881 million
and $589 million at December 31, 2008, 2007 and 2006, respectively.

Federal funds purchased and securities loaned
or sold under repurchase agreements

192,546

154,398

Commercial paper and other borrowed funds

170,245

78,431

Trading liabilities:

Debt and equity instruments

45,274

89,162

Derivative payables

121,604

68,705

Accounts payable and other liabilities

187,978

94,476

Beneficial interests issued by consolidated VIEs

10,561

14,016

Long-term debt and trust preferred capital
debt securities

270,683

199,010

Total liabilities

2,008,168

1,438,926

Stockholders’ equity

166,884

123,221

Total liabilities and stockholders’
equity

$

2,175,052

$

1,562,147

Consolidated Balance Sheets overview
The following is a discussion of the
significant changes in the Consolidated
Balance Sheets from December 31, 2007.

Deposits with banks; federal funds sold and
securities purchased under resale agreements;
securities borrowed; federal funds purchased and
securities loaned or sold under repurchase
agreements
The Firm utilizes deposits with banks, federal
funds sold and securities purchased under resale
agreements, securities borrowed, and federal funds
purchased and securities loaned or sold under
repurchase agreements as part of its liquidity
management activities to manage the Firm’s cash
positions and risk-based capital requirements and
to support the Firm’s trading and risk management
activities. In particular, the Firm uses
securities purchased under resale agreements and
securities borrowed to provide funding or liquidity
to clients by purchasing and borrowing clients’
securities for the short-term. Federal funds
purchased and securities loaned or sold

under repurchase agreements are used as short-term
funding sources for the Firm and to make securities
available to clients for their short-term purposes.
The increase from December 31, 2007, in deposits
with banks reflected a higher level of interbank
lending; a reclassification of deposits with the
Federal Reserve Bank from cash and due from banks
to deposits with banks reflecting a policy change
of the Federal Reserve Bank to pay interest to
depository institutions on reserve balances, and
assets acquired as a result of the Bear Stearns
merger. The increase in securities borrowed and
securities purchased under resale agreements was
related to assets acquired as a result of the Bear
Stearns merger and growth in demand from clients
for liquidity. The increase in securities sold
under repurchase agreements reflected higher
short-term funding requirements to fulfill clients’
demand for liquidity and finance the Firm’s AFS
securities inventory, and the effect of the
liabilities assumed in connection with the Bear
Stearns merger. For additional information on the
Firm’s Liquidity Risk Management, see pages 76–80
of this Annual Report.

Trading assets and liabilities – debt and equity instruments
The Firm uses debt and equity trading instruments
for both market-making and proprietary risk-taking
activities. These instruments consist predominantly
of fixed income securities, including government
and corporate debt; equity, including convertible
securities; loans, including certain prime mortgage
and other loans warehoused by RFS and IB for sale
or securitization purposes and accounted for at
fair value under SFAS 159; and physical commodities
inventories. The decreases in trading assets and
liabilities – debt and equity instruments from
December 31, 2007, reflected the effect of the
challenging capital markets environment,
particularly for debt securities, partially offset
by positions acquired as a result of the Bear
Stearns merger. For additional information, refer
to Note 4 and Note 6 on pages 129–143 and
146–148, respectively, of this Annual Report.

Trading assets and liabilities – derivative
receivables and payables
Derivative instruments enable end-users to
increase, reduce or alter exposure to credit or
market risks. The value of a derivative is derived
from its reference to an underlying variable or
combination of variables such as interest rate,
credit, foreign exchange, equity or commodity
prices or indices. JPMorgan Chase makes markets in
derivatives for customers, is an end-user of
derivatives for its principal risk-taking
activities, and is also an end-user of derivatives
to hedge or manage risks of market and credit exposures,
modify the interest rate characteristics of related
balance sheet instruments or meet longer-term
investment objectives. The majority of the Firm’s
derivatives are entered into for market-making
purposes. The increase in derivative receivables
and payables from December 31, 2007, was primarily
related to the decline in interest rates, widening
credit spreads and volatile foreign exchange rates
reflected in interest rate, credit and foreign
exchange derivatives, respectively. The increase
also included positions acquired in the Bear
Stearns merger. For additional information, refer
to derivative contracts, Note 4, Note 6 and Note 32
on pages 129–143, 146–148, and 202–205,
respectively, of this Annual Report.

Securities
Almost all of the Firm’s securities portfolio is
classified as AFS and is used predominantly to
manage the Firm’s exposure to interest rate
movements, as well as to make strategic longer-term
investments. The AFS portfolio increased from
December 31, 2007, predominantly as a result of
purchases, partially offset by sales and
maturities. For additional information related to
securities, refer to the Corporate/Private Equity
segment discussion, Note 4 and Note 12 on pages
61–63, 129–143 and 158–162, respectively, of
this Annual Report.

Loans and allowance for loan losses
The Firm provides loans to a variety of customers,
from large corporate and institutional clients to
individual consumers. Loans increased from December31, 2007, largely due to loans acquired in the
Washington Mutual transaction, organic growth in
lending in the wholesale businesses, particularly
CB, and growth in the consumer prime mortgage
portfolio driven by the decision to retain, rather
than sell, new originations of nonconforming
mortgage loans.

Both the consumer and wholesale components of the
allowance for loan losses increased from the prior
year reflecting the addition of noncredit-impaired
loans acquired in the Washington Mutual
transaction, including an increase to conform the allowance applicable to assets acquired from Washington Mutual to the
Firm’s loan loss methodologies. Excluding the
Washington Mutual transaction the consumer
allowance rose due to an increase in estimated
losses for home equity, subprime mortgage, prime
mortgage and credit card loans due to the effects
of continued housing price declines, rising
unemployment and a weakening economic environment.
Excluding the Washington Mutual transaction, the
increase in the wholesale allowance was due to the
impact of the transfer of $4.9 billion of funded
and unfunded leveraged lending loans in IB to the
retained loan portfolio from the held-for-sale loan
portfolio, the effect of a weakening credit environment and loan growth. For a more detailed
discussion of the loan portfolio and the allowance
for loan losses, refer to Credit Risk Management on
pages 80–99, and Notes 4, 5, 14 and 15 on pages
129–143, 144–146, 163–166 and 166–168,
respectively, of this Annual Report.

Accrued interest and accounts receivable; accounts
payable and other liabilities
The Firm’s accrued interest and accounts receivable
consist of accrued interest receivable from
interest-earning assets; receivables from customers
(primarily from activities related to IB’s Prime
Services business);
receivables from brokers, dealers and clearing
organizations; and receivables from failed
securities sales. The Firm’s accounts payable and
other liabilities consist of accounts payable to
customers (primarily from activities related to
IB’s Prime Services business), payables to brokers,
dealers and clearing organizations; payables from
failed securities purchases; accrued expense,
including for interest-bearing liabilities; and all
other liabilities, including obligations to return
securities received as collateral. The increase in
accrued interest and accounts receivable from
December 31, 2007, was due largely to the Bear
Stearns merger, reflecting higher customer
receivables in IB’s Prime Services business and the
Washington Mutual transaction. The increase in
accounts payable and other liabilities

was predominantly due to the Bear Stearns merger,
reflecting higher customer payables (primarily
related to IB’s Prime Services business), as well
as higher obligations to return securities received
as collateral. For additional information, see Note
22 on page 190 of this Annual Report.

Goodwill
Goodwill arises from business combinations and
represents the excess of the cost of an acquired
entity over the net fair value amounts assigned to
assets acquired and liabilities assumed. The
increase in goodwill was due predominantly to the
dissolution of Chase Paymentech Solutions joint
venture, the merger with Bear Stearns, the purchase
of an additional equity interest in Highbridge and
tax-related purchase accounting adjustments
associated with the Bank One merger, which
increased goodwill attributed to IB. These
items were offset partially by a decrease in
goodwill attributed to TSS predominantly resulting
from the sale of a previously consolidated
subsidiary. For additional information, see Note 18
on pages 186–189 of this Annual Report.

Other intangible assets
The Firm’s other intangible assets consist of MSRs,
purchased credit card relationships, other credit
card-related intangibles, core deposit intangibles,
and other intangibles. MSRs increased due to the
Washington Mutual transaction and the Bear Stearns
merger; sales in RFS of originated loans; and
purchases of MSRs. These increases in MSRs were
partially offset by markdowns of the fair value of
the MSR asset due to changes to inputs and
assumptions in the MSR valuation model, including
updates to prepayment assumptions to reflect
current expectations, and to servicing portfolio
run-offs. The decrease in other intangible assets
reflects amortization expense associated with
credit card-related and core deposit intangibles,
partially offset by increases due to the
dissolution of the Chase Paymentech Solutions joint
venture, the purchase of an additional equity
interest in Highbridge, and the acquisition of an
institutional global custody portfolio. For
additional information on MSRs and other intangible
assets, see Note 18 on pages 186–189 of this
Annual Report.

Other assets
The Firm’s other assets consist of private equity
and
other investments, collateral received, corporate
and bank-owned life insurance policies, premises
and equipment, assets acquired in loan satisfaction
(including real estate owned), and all other
assets. The increase in other assets from December31, 2007, was due to the Bear Stearns merger, which
partly resulted in a higher volume of collateral
received from customers, the Washington Mutual
transaction, and the purchase of asset-backed
commercial paper from money market mutual funds in
connection with the Federal Reserve’s Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity
Facility (“AML Facility”), which was established by
the Federal Reserve on September 19, 2008, as a
temporary lending facility to provide liquidity to
eligible MMMFs. For additional information
regarding the AML Facility, see Executive Overview
and Note 22 on pages 29–32 and 190 respectively,
of this Annual Report.

Deposits
The Firm’s deposits represent a liability to
customers, both retail and wholesale, related to
non-brokerage funds held on their behalf. Deposits
are generally classified by location (U.S. and
non-U.S.), whether they are interest or
noninterest-bearing, and by type (i.e., demand,
money market deposit, savings, time or negotiable
order of withdrawal accounts). Deposits help
provide a stable and consistent source of funding
for the Firm. Deposits were at a higher level
compared with the level at December 31, 2007,
predominantly from the deposits assumed in the
Washington Mutual transaction, net increases in
wholesale interest- and noninterest-bearing
deposits in TSS, AM and CB. The increase in TSS was
driven by both new and existing clients, and due to
the deposit inflows related to the heightened
volatility and credit concerns affecting the
markets. For more information on deposits, refer to
the TSS and RFS segment discussions on pages 56–57
and 45–50, respectively, and the Liquidity Risk
Management discussion on pages 76–80 of this
Annual Report. For more information on wholesale
liability balances, including deposits, refer to
the CB and TSS segment discussions on pages 54–55
and 56–57 of this Annual Report.

Commercial paper and other borrowed funds
The Firm utilizes commercial paper and other
borrowed funds as part of its liquidity management
activities to meet short-term funding needs, and in
connection with a TSS liquidity management product
whereby excess client funds, are transferred into
commercial paper overnight sweep accounts. The
increase in other borrowed funds was predominantly
due to advances from Federal Home Loan Banks of
$70.2 billion (net of maturities of $10.4 billion)
that were assumed as part of the Washington Mutual
transaction and nonrecourse advances from the
Federal Reserve Bank of Boston (“FRBB”) to fund
purchases of asset-backed commercial paper from money market mutual
funds, and other borrowings from the Federal
Reserve under the Term Auction Facility program.
For additional information on the Firm’s Liquidity
Risk Management and other borrowed funds, see pages
76–80 and Note 21 on page 190 of this Annual
Report.

Long-term debt and trust preferred capital debt securities
The Firm utilizes long-term debt and trust
preferred capital debt securities to provide
cost-effective and diversified sources of funds and
as critical components of the Firm’s liquidity and
capital management. Long-term debt and trust
preferred capital debt securities increased from
December 31, 2007, predominantly due to debt
assumed in both the Bear Stearns merger and the
Washington Mutual transaction, and debt issuances
of $20.8 billion, which are guaranteed by the FDIC
under its Temporary Liquidity Guarantee Program
(the “TLG Program”). These increases were partially
offset by net maturities and redemptions, including
IB structured notes, the issuances of which are
generally client-driven. For additional information
on the Firm’s long-term debt activities, see the
Liquidity Risk Management discussion on pages
76–80 and Note 23 on pages 191–192 of this Annual
Report.

Stockholders’ equity
The increase in total stockholders’ equity from
December 31, 2007, was predominantly due to the
issuance of preferred and common equity securities
during 2008. In the fourth quarter of 2008,
JPMorgan Chase participated in the Capital Purchase
Program and issued preferred stock and a warrant to
purchase common stock to the U.S. Treasury,
resulting in a $25.0 billion increase to
stockholders’ equity. Additional preferred stock
issuances and a common stock issuance during 2008
increased equity by $19.3 billion. Equity from
issuances of stock awards under the Firm’s employee
stock-based compensation plans, the Bear Stearns
merger, and net income for 2008 was more than
offset by the declaration of cash dividends and net
losses recorded within accumulated other
comprehensive income related to AFS securities and
defined benefit pension and OPEB plans. For a
further discussion, see the Capital Management
section that follows, and Note 24 and Note 27 on
pages 193–194 and 196–197, respectively, of this
Annual Report.

JPMorgan Chase is involved with several types
of off-balance sheet arrangements, including
special purpose entities (“SPEs”) and
lending-related financial instruments (e.g.,
commitments and guarantees).

Special-purpose entities

The basic SPE structure involves a company
selling assets to the SPE. The SPE funds the
purchase of those assets by issuing securities to
investors in the form of commercial paper,
short-term asset-backed notes, medium-term notes
and other forms of interest. SPEs are generally
structured to insulate investors from claims on the
SPE’s assets by creditors of other entities,
including the creditors of the seller of the
assets.

SPEs are an important part of the financial
markets, providing market liquidity by facilitating
investors’ access to specific portfolios of assets
and risks. These arrangements are integral to the
markets for mortgage-backed securities, commercial
paper and other asset-backed securities.

JPMorgan Chase uses SPEs as a source of liquidity
for itself and its clients by securitizing
financial assets, and by creating investment
products for clients. The Firm is involved with
SPEs through multi-seller conduits and investor
intermediation activities, and as a result of its
loan securitizations, through qualifying special
purpose entities (“QSPEs”). This discussion focuses
mostly on multi-seller conduits and investor
intermediation. For a detailed discussion of all
SPEs with which the Firm is involved, and the
related accounting, see Note 1, Note 16 and Note 17
on pages 122–123, 168–176 and 177–186,
respectively of this Annual Report.

The Firm holds capital, as deemed appropriate,
against all SPE-related transactions and related
exposures, such as derivative transactions and
lending-related commitments and guarantees.

The Firm has no commitments to issue its own stock
to support any SPE transaction, and its policies
require that transactions with SPEs be conducted
at arm’s length and reflect market pricing.
Consistent with this policy, no JPMorgan Chase
employee is permitted to invest in SPEs with which
the Firm is involved where such investment would
violate the Firm’s Code of Conduct. These rules
prohibit employees from self-dealing and acting on
behalf of the Firm in transactions with which they
or their family have any significant financial
interest.

Implications of a credit rating
downgrade to
JPMorgan Chase Bank,
N.A.
For certain liquidity commitments to SPEs, the Firm
could be required to provide funding if the
short-term credit rating of JPMorgan Chase Bank,
N.A., was downgraded below specific levels,
primarily “P-1”,
“A-1” and “F1” for Moody’s, Standard & Poor’s and
Fitch,
respectively. The amount of these liquidity
commitments was $61.0 billion and $94.0 billion at
December 31, 2008 and 2007, respectively.
Alternatively, if JPMorgan Chase Bank, N.A., were
downgraded, the Firm could be replaced by another
liquidity provider in lieu of providing funding
under the liquidity commitment, or in certain
circumstances,

the Firm could facilitate the sale or
refinancing of the assets in the SPE in order to
provide liquidity. These commitments are included
in other unfunded commitments to extend credit and
asset purchase agreements, as shown in the
Off-balance sheet lending-related financial
instruments and guarantees table on page 69 of this
Annual Report.

As noted above, the Firm is involved with three
types of SPEs. A summary of each type of SPE
follows.

Multi-seller conduits
The Firm helps customers meet their financing needs
by providing access to the commercial paper markets
through variable interest entities (“VIEs”) known
as multi-seller conduits. Multi-seller conduit
entities are separate bankruptcy-remote entities
that purchase interests in, and make loans secured
by, pools of receivables and other financial assets
pursuant to agreements with customers of the Firm.
The conduits fund their purchases and loans through
the issuance of highly rated commercial paper to
third-party investors. The primary source of
repayment of the commercial paper is the cash flow
from the pools of assets. JPMorgan Chase receives
fees related to the structuring of multi-seller
conduit transactions and receives compensation from
the multi-seller conduits for its role as
administrative agent, liquidity provider, and
provider of program-wide credit enhancement.

Investor intermediation
As a financial intermediary, the Firm creates
certain types of VIEs and also structures
transactions, typically derivative structures, with
these VIEs to meet investor needs. The Firm may
also provide liquidity and other support. The risks
inherent in derivative instruments or liquidity
commitments are managed similarly to other credit,
market and liquidity risks to which the Firm is
exposed. The principal types of VIEs the Firm uses
in these structuring activities are municipal bond
vehicles, credit-linked note vehicles and
collateralized debt obligation vehicles.

Loan securitizations
JPMorgan Chase securitizes and sells a variety of
loans, including residential mortgages, credit
cards, automobile, student, and commercial loans
(primarily related to real estate). JPMorgan
Chase-sponsored securitizations utilize SPEs as
part of the securitization process. These SPEs are
structured to meet the definition of a QSPE (as
discussed in Note 1 on page 122 of this Annual
Report); accordingly, the assets and liabilities of
securitization-related QSPEs are not reflected on
the Firm’s Consolidated Balance Sheets (except for
retained interests, as described below). The
primary purpose of these vehicles is to meet
investor needs and generate liquidity for the Firm
through the
sale of loans to the QSPEs. These QSPEs are
financed through the issuance of fixed or
floating-rate asset-backed securities that are sold
to third-party investors or held by the Firm.

Consolidation and consolidation sensitivity analysis on capital
For more information regarding these programs and
the Firm’s other SPEs, as well as the Firm’s
consolidation analysis for these programs, see Note
16 and Note 17 on pages 168–176 and 177–186,
respectively, of this Annual Report.

Special-purpose entities revenue
The following table summarizes certain revenue
information related to consolidated and
nonconsolidated VIEs and QSPEs with which the Firm
has significant involvement. The revenue reported
in the table below primarily represents contractual
servicing and credit fee income (i.e., for income
from acting as administrator, structurer, liquidity
provider). It does not include mark-to-market gains
and losses from changes in the fair value of
trading positions (such as derivative transactions)
entered into with VIEs. Those gains and losses are
recorded in principal transactions revenue.

Revenue from VIEs and QSPEs

Year ended December 31,

(in millions)

2008

2007

2006

VIEs:(a)

Multi-seller conduits

$

314

$

187

(b)

$

160

Investor intermediation

18

33

49

Total VIEs

332

220

209

QSPEs(c)

1,746

1,420

1,131

Total

$

2,078

$

1,640

$

1,340

(a)

Includes revenue associated with consolidated VIEs and significant nonconsolidated
VIEs.

(b)

Excludes the markdown on subprime CDO assets that was recorded in principal
transactions revenue in 2007.

(c)

Excludes servicing revenue from loans sold to and securitized
by third parties. Prior period amounts have been revised to conform to the current period presentation.

American Securitization Forum subprime
adjustable rate mortgage loans modifications
In December 2007, the American Securitization Forum
(“ASF”) issued the “Streamlined Foreclosure and
Loss Avoidance Framework for Securitized Subprime
Adjustable Rate Mortgage Loans” (“the Framework”).
The Framework provides guidance for servicers to
streamline evaluation procedures of borrowers with
certain subprime adjustable rate mortgage (“ARM”)
loans to more efficiently provide modification of
such loans with terms that are more appropriate for
the individual needs of such borrowers. The
Framework applies to all first-lien subprime ARM
loans that have a fixed rate of interest for an
initial period of 36 months or less; are included
in
securitized pools; were originated between January1, 2005, and July 31, 2007; and have an initial
interest rate reset date between January 1, 2008,
and July 31, 2010. The Framework categorizes the
population of ASF Framework Loans into three
segments. Segment 1 includes loans where the
borrower is current and likely to be able to
refinance into any available mortgage product.
Segment 2 includes loans where the borrower is
current, unlikely to be able to refinance into any
readily available mortgage industry product and
meets certain defined criteria. Segment 3 includes
loans where the borrower is not current, as
defined, and does not meet the criteria for
Segments 1 or 2.
JPMorgan Chase adopted the Framework during the
first quarter of 2008. For those AFS Framework
Loans serviced by the Firm and owned by
Firm-sponsored QSPEs, the Firm modified principal
amounts of $1.7 billion of Segment 2 subprime
mortgages during the year ended December 31, 2008.
The following table presents selected information
relating to the principal amount of Segment 3
loans for the year ended December 31, 2008, including those that
have been modified, subjected to other loss mitigation activities or
have been prepaid by the borrower.

Year ended December 31, (in millions)

2008

Loan modifications

$

2,384

Other loss mitigation activities

865

Prepayments

219

For additional discussion of the Framework,
see Note 16 on page 176 of this Annual Report.

JPMorgan Chase utilizes lending-related
financial instruments (e.g., commitments and
guarantees) to meet the financing needs of its
customers. The contractual amount of these
financial instruments represents the maximum
possible credit risk should the counterparty draw
upon the commitment or the Firm be required to
fulfill its obligation under the guarantee, and
the counterparty subsequently fail to perform
according to the terms of the contract. These
commitments and guarantees historically expire
without being drawn and even higher proportions
expire without a default. As a result, the total
contractual amount of these instruments is not, in
the Firm’s view, representative of its actual
future credit exposure or funding requirements.
Further, certain commitments, primarily related to
consumer financings, are cancelable, upon notice,
at the option of the Firm. For further discussion
of lending-related commitments and guarantees and
the Firm’s accounting for them, see
lending-related commitments in Credit Risk
Management on page 90 and Note 33 on pages
206–210 of this Annual Report.

Contractual cash obligations

In the normal course of business, the Firm
enters into various contractual obligations that
may require future cash payments. Commitments for
future cash expenditures primarily include
contracts to purchase
future services and capital expenditures related to
real estate–related obligations and equipment.

The accompanying table summarizes, by remaining
maturity, JPMorgan Chase’s off-balance sheet
lending-related financial instruments and
significant contractual cash obligations at
December 31, 2008. Contractual purchases and
capital expenditures in the table below reflect
the minimum contractual obligation under legally
enforceable contracts with terms that are both
fixed and determinable. Excluded from the
following table are a number of obligations to be
settled in cash, primarily in under one year.
These obligations are reflected on the Firm’s
Consolidated Balance Sheets and include federal
funds purchased and securities loaned or sold
under repurchase agreements; commercial paper;
other borrowed funds; purchases of debt and equity
instruments; derivative payables; and certain
purchases of instruments that resulted in
settlement failures. Also excluded are contingent
payments associated with certain acquisitions that
could not be estimated. For discussion regarding
long-term debt and trust preferred capital debt
securities, see Note 23 on pages 191–192 of this
Annual Report. For discussion regarding operating
leases, see Note 31 on page 201 of this Annual
Report.

Includes credit card and home equity lending-related commitments of $623.7 billion
and $95.7 billion, respectively, at December 31, 2008; and $714.8 billion and $74.2
billion, respectively, at December 31, 2007. These amounts for credit card and home equity
lending-related commitments represent the total available credit for these products. The
Firm has not experienced, and does not anticipate, that all available lines of credit for
these products will be utilized at the same time. The Firm can reduce or cancel these
lines of credit by providing the borrower prior notice or, in some cases, without notice
as permitted by law.

(b)

Includes unused advised lines of credit totaling $36.3 billion and $38.4 billion
at December 31, 2008 and 2007, respectively, which are not legally binding. In regulatory
filings with the Federal Reserve, unused advised lines are not reportable. See the
Glossary of terms, on page 218 of this Annual Report, for the Firm’s definition of advised
lines of credit.

Excludes unfunded commitments to third-party private equity funds of $1.4 billion
and $881 million at December 31, 2008 and 2007, respectively. Also excluded unfunded
commitments for other equity investments of $1.0 billion and $903 million at December 31,2008 and 2007, respectively.

(e)

Includes commitments to investment and noninvestment grade counterparties in
connection with leveraged acquisitions of $3.6 billion and $8.2 billion at December 31,2008 and 2007, respectively.

(f)

Largely represents asset purchase agreements to the Firm’s administered
multi-seller, asset-backed commercial paper conduits. The maturity is based upon the
weighted-average life of the underlying assets in the SPE, which are based upon the
remainder of each conduit transaction’s committed liquidity plus either the expected
weighted average life of the assets should the committed liquidity expire without renewal,
or the expected time to sell the underlying assets in the securitization market. It also
includes $96 million and $1.1 billion of asset purchase agreements to other third-party
entities at December 31, 2008 and 2007, respectively.

(g)

JPMorgan Chase held collateral relating to $31.0 billion and $31.5 billion of
these arrangements at December 31, 2008 and 2007, respectively. Prior periods have been
revised to conform to the current presentation.

(h)

Includes unissued standby letters of credit commitments of $39.5 billion and $50.7
billion at December 31, 2008 and 2007, respectively.

(i)

Collateral held by the Firm in support of securities lending indemnification
agreements was $170.1 billion and $390.5 billion at December 31, 2008 and 2007,
respectively. Securities lending collateral comprises primarily cash, securities issued by
governments that are members of the Organisation for Economic Co-operation and Development
and U.S. government agencies.

(j)

Represents notional amounts of derivatives qualifying as guarantees. For further
discussion of guarantees, see Note 33 on pages 206–210 of this Annual Report.

(k)

Included on the Consolidated Balance Sheets in beneficial interests issued by
consolidated variable interest entities.

(l)

Includes noncancelable operating leases for premises and equipment used primarily
for banking purposes and for energy-related tolling service agreements. Excludes the
benefit of noncancelable sublease rentals of $2.3 billion and $1.3 billion at December 31,2008 and 2007, respectively.

(m)

Includes deferred annuity contracts. Excludes the $1.3 billion discretionary
contribution to the Firm’s U.S. defined benefit pension plan that was made on January 15,2009 (for further discussion, see Note 9 on pages 149–155), and contributions to the U.S.
and non-U.S. other postretirement benefits plans, if any, as these contributions are not
reasonably estimable at this time. Also excluded are unrecognized tax benefits of $5.9
billion and $4.8 billion at December 31, 2008 and 2007, respectively, as the timing and
amount of future cash payments are not determinable at this time.

The Firm’s capital management framework is
intended to ensure that there is capital sufficient
to support the underlying risks of the Firm’s
business activities and to maintain
“well-capitalized” status under regulatory
requirements. In addition, the Firm holds capital
above these requirements in amounts deemed
appropriate to achieve the Firm’s regulatory and
debt rating objectives. The process of assigning
equity to the lines of business is integrated into
the Firm’s capital framework and is overseen by the
ALCO.

Line of business equity

The Firm’s framework for allocating capital is
based upon the following objectives:

•

integrate firmwide capital management activities with capital management activities
within each of the lines of business

•

measure performance consistently across all lines of business

•

provide comparability with peer firms for each of the lines of business

Equity for a line of business represents the amount
the Firm believes the business would require if it
were operating independently, incorporating
sufficient capital to address economic risk
measures, regulatory capital requirements and
capital levels for similarly rated peers. Capital
is also allocated to each line of business for,
among other things, goodwill and other intangibles
associated with acquisitions effected by the line
of business. Return on common equity is measured
and internal targets for expected returns are
established as a key measure of a business
segment’s performance.

Relative to 2007, line of business equity increased
during 2008, reflecting growth across the
businesses. In addition, at the end of the third
quarter of 2008, equity was increased for each line
of business in anticipation of the future
implementation of the new Basel II capital rules.
For further details on these rules, see Basel II on
page 72 of this Annual Report. Finally, during
2008, capital allocated to RFS, CS, and CB was
increased as a result of the Washington Mutual
transaction; capital allocated to AM was increased
due to the Bear Stearns merger and the purchase of
the additional equity interest in Highbridge; and
capital allocated to IB was increased due to the
Bear Stearns merger.

In accordance with SFAS 142, the lines of
business perform the required goodwill impairment
testing. For a further discussion of goodwill and
impairment testing, see Critical Accounting
Estimates Used by the Firm and Note 18 on pages
107–111 and 186–189, respectively, of this
Annual Report.

Line of business equity

December 31, (in billions)

2008

2007

Investment Bank

$

33.0

$

21.0

Retail Financial Services

25.0

16.0

Card Services

15.0

14.1

Commercial Banking

8.0

6.7

Treasury & Securities Services

4.5

3.0

Asset Management

7.0

4.0

Corporate/Private Equity

42.4

58.4

Total common stockholders’ equity

$

134.9

$

123.2

Line of business equity

Yearly Average

(in billions)

2008

2007

Investment Bank

$

26.1

$

21.0

Retail Financial Services

19.0

16.0

Card Services

14.3

14.1

Commercial Banking

7.3

6.5

Treasury & Securities Services

3.8

3.0

Asset Management

5.6

3.9

Corporate/Private Equity(a)

53.0

54.2

Total common stockholders’ equity

$

129.1

$

118.7

(a)

2008 and 2007 include $41.9 billion and $41.7 billion, respectively, of equity to
off-set goodwill, and $11.1 billion and $12.5 billion, respectively, of equity, primarily
related to Treasury, Private Equity and the Corporate pension plan.

Economic risk capital

JPMorgan Chase assesses its capital adequacy
relative to the risks underlying the Firm’s
business activities, utilizing internal
risk-assessment methodologies. The Firm assigns
economic capital primarily based upon four risk
factors: credit risk, market risk, operational risk
and private equity risk. In 2008, the growth in
economic risk capital was driven by higher credit
risk capital, which was increased primarily due to
a combination of higher derivative exposure, a
weakening credit environment, and asset growth
related to the Bear Stearns and Washington Mutual
transactions.

Economic risk capital

Yearly Average

(in billions)

2008

2007

Credit risk

$

37.8

$

30.0

Market risk

10.5

9.5

Operational risk

6.3

5.6

Private equity risk

5.3

3.7

Economic risk capital

59.9

48.8

Goodwill

46.1

45.2

Other(a)

23.1

24.7

Total common stockholders’ equity

$

129.1

$

118.7

(a)

Reflects additional capital required, in the Firm’s view, to meet its regulatory
and debt rating objectives.

Credit risk capital for the overall wholesale
credit portfolio is defined in terms of unexpected
credit losses, both from defaults and declines in
the portfolio value due to credit deterioration,
measured over a one-year period at a confidence
level consistent with an “AA” credit rating
standard. Unexpected losses are losses in excess of
those for which provisions for credit losses are
maintained. The capital methodology is based upon
several principal drivers of credit risk: exposure
at default (or loan-equivalent amount), default
likelihood, credit spreads, loss severity and
portfolio correlation.

Credit risk capital for the consumer portfolio is
based upon product and other relevant risk
segmentation. Actual segment level default and
severity experience are used to estimate unexpected
losses for a one-year horizon at a confidence level
consistent with an “AA” credit rating standard.
Statistical results for certain segments or
portfolios are adjusted to ensure that capital is
consistent with external benchmarks, such as
subordination levels on market transactions or
capital held at representative monoline
competitors, where appropriate.

Market risk capital
The Firm calculates market risk capital guided by
the principle that capital should reflect the risk
of loss in the value of portfolios and financial
instruments caused by adverse movements in market
variables, such as interest and foreign exchange
rates, credit spreads, securities prices and
commodities prices. Daily Value-at-Risk (“VaR”),
biweekly stress-test results and other factors are
used to determine appropriate capital levels. The
Firm allocates market risk capital to each business
segment according to a formula that weights that
segment’s VaR and stress-test exposures. See Market
Risk Management on pages 99–104 of this Annual
Report for more information about these market risk
measures.

Operational risk capital
Capital is allocated to the lines of business for
operational risk using a risk-based capital
allocation methodology which estimates operational
risk on a bottom-up basis. The operational risk
capital model is based upon actual losses and
potential scenario-based stress losses, with
adjustments to the capital calculation to reflect
changes in the quality of the control environment
or the use of risk-transfer products. The Firm
believes its model is consistent with the new Basel
II Framework.

Private equity risk capital
Capital is allocated to privately and publicly held
securities, third-party fund investments and
commitments in the private equity portfolio to
cover the potential loss associated with a decline
in equity markets and related asset devaluations.
In addition to negative market fluctuations,
potential losses in private equity investment
portfolios can be magnified by liquidity risk. The
capital allocation for the private equity portfolio
is based upon measurement of the loss experience
suffered by the Firm and other market participants
over a prolonged period of adverse equity market
conditions.

Regulatory capital

The Board of Governors of the Federal Reserve
System (the “Federal Reserve”) establishes capital
requirements, including well-capitalized standards
for the consolidated financial holding company. The
Office of the Comptroller of the Currency (“OCC”)
establishes similar capital requirements and
standards for the Firm’s national banks, including
JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A.

The Federal Reserve granted the Firm, for a period
of 18
months following the Bear Stearns merger, relief up
to a certain specified amount and subject to certain
conditions from the Federal Reserve’s risk-based
capital and leverage requirements with respect to
Bear Stearns’ risk-weighted assets and other
exposures acquired. The amount of such relief is
subject to reduction by one-sixth each quarter
subsequent to the merger and expires on October 1,2009. The OCC granted JPMorgan Chase Bank, N.A.
similar relief from its risk-based capital and
leverage requirements.

JPMorgan Chase maintained a well-capitalized
position, based upon Tier 1 and Total capital
ratios at December 31, 2008 and 2007, as indicated
in the tables below. For more information, see
Note 30 on pages 200–201 of this Annual Report.

Risk-based capital components and assets

December 31, (in millions)

2008

2007

Total Tier 1
capital(a)

$

136,104

$

88,746

Total Tier 2 capital

48,616

43,496

Total capital

$

184,720

$

132,242

Risk-weighted assets

$

1,244,659

$

1,051,879

Total adjusted average assets

1,966,895

1,473,541

(a)

The FASB has been deliberating certain amendments to both
SFAS 140 and FIN 46R that may impact the accounting for
transactions that involve QSPEs and VIEs. Based on the provisions of
the current proposal and the Firm's interpretation of the proposal,
the Firm estimates that the impact of consolidation could be up to
$70 billion of credit card receivables, $40 billion of
assets related to Firm-sponsored multi-seller conduits, and
$50 billion of other loans (including residential mortgages);
the decrease in the Tier 1 capital ratio could be approximately
80 basis points. The ultimate impact could differ significantly
due to the FASB's continuing deliberations on the final requirements
of the rule and market conditions.

Additional information regarding the Firm’s
capital ratios and the federal regulatory capital
standards to which it is subject, and the capital
ratios for the Firm’s significant banking
subsidiaries at December 31, 2008 and 2007, are
presented in Note 30 on pages 200–201 of this
Annual Report.

Capital Purchase Program
Pursuant to the Capital Purchase Program, on
October 28, 2008, the Firm issued to the U.S.
Treasury, for total proceeds of $25.0 billion,
(i)
2.5 million shares of Series K Preferred Stock, and
(ii) a Warrant to purchase up to 88,401,697 shares
of the Firm’s common stock, at an exercise price of
$42.42 per share, subject to certain antidilution
and other adjustments. The Series K Preferred Stock
qualifies as Tier 1 capital.

The Series K Preferred Stock bears cumulative
dividends at a rate of 5% per year for the first
five years and 9% per year thereafter. The Series K Preferred
Stock ranks equally with the Firm’s existing 6.15%
Cumulative Preferred Stock, Series E;
5.72% Cumulative Preferred Stock, Series F;
5.49% Cumulative Preferred Stock, Series G;
Fixed-to-Floating Rate Noncumulative Perpetual
Preferred Stock, Series I; and 8.63%
Noncumulative Perpetual Preferred Stock, Series
J, in terms of dividend payments and upon
liquidation of the Firm.

Any accrued and unpaid dividends on the Series K
Preferred Stock must be fully paid before dividends
may be declared or paid on stock ranking junior or
equally with the Series K Preferred Stock. Pursuant to the Capital Purchase Program, until October 28, 2011, the U.S. Treasury’s consent
is required for any increase in dividends on the Firm’s common
stock from the amount of the last quarterly stock dividend declared
by the Firm prior to October 14, 2008, unless the Series K
Preferred Stock is redeemed in whole before then, or the U.S.
Treasury has transferred all of the Series K Preferred Stock it
owns to third parties.

The Firm may not repurchase or redeem any common
stock or other equity securities of the Firm, or
any trust preferred securities issued by the Firm
or any of its affiliates, without the prior
consent of the U.S. Treasury (other than (i)
repurchases of the Series K Preferred Stock and
(ii) repurchases of junior preferred shares or
common stock in connection with any employee
benefit plan in the ordinary course of business
consistent with past practice).

Basel II
The minimum risk-based capital requirements adopted
by the U.S. federal banking agencies follow the
Capital Accord of the Basel Committee on Banking
Supervision. In 2004, the Basel Committee published
a revision to the Accord (“Basel II”). The goal of
the new Basel II Framework is to provide more
risk-sensitive regulatory capital calculations and
promote enhanced risk management practices among
large, internationally active banking
organizations. U.S. banking regulators published a
final Basel II rule in December 2007, which will
require JPMorgan Chase to implement Basel II at the
holding company level, as well as at certain of its
key U.S. bank subsidiaries.

Prior to full implementation of the new Basel II
Framework, JPMorgan Chase will be required to
complete a qualification period of four consecutive
quarters during which it will need to demonstrate
that it meets the requirements of the new rule to
the satisfaction of its primary U.S. banking
regulators. The U.S. implementation timetable
consists of the qualification period, starting any
time between April 1, 2008, and April 1, 2010,
followed by a minimum transition period of three
years. During the transition period, Basel II
risk-based capital requirements cannot fall below
certain floors based on current (“Basel l”)
regulations. JPMorgan Chase expects to be in
compliance with all relevant Basel II rules within
the established timelines. In addition, the Firm
has adopted, and will continue to adopt, based upon
various established timelines, Basel II in certain
non-U.S. jurisdictions, as required.

JPMorgan
Securities and J.P. Morgan Clearing Corp. have elected to compute
their minimum net capital requirements in accordance with
the “Alternative Net Capital Requirement” of the Net
Capital Rule. At December 31, 2008, JPMorgan
Securities’ net capital, as defined by the Net
Capital Rule, of $7.2 billion exceeded the minimum
requirement by $6.6 billion. In addition to its net
capital requirements, JPMorgan Securities is
required to

hold tentative net capital in excess of $1.0
billion and is also required to notify the
Securities and Exchange Commission (“SEC”) in the
event that tentative net capital is less than $5.0
billion in accordance with the market and credit
risk standards of Appendix E of the
Net Capital Rule. As of December 31, 2008, JPMorgan
Securities had tentative net capital in excess of
the minimum and the notification requirements. On
October 1, 2008, J.P. Morgan Securities Inc. merged
with and into Bear, Stearns & Co. Inc., and the
surviving entity changed its name to J.P. Morgan
Securities Inc.

On
February 23, 2009, the Board of Directors reduced the
Firm’s quarterly common stock dividend from $0.38 to $0.05 per
share, effective for the dividend payable April 30, 2009 to
shareholders of record on April 6, 2009. JPMorgan Chase declared
quarterly cash dividends on its commons stock in the amount of $0.38
for each quarter of 2008 and the second, third and fourth quarters of
2007, and $0.34 per share for the first quarter of 2007 and for each
quarter of 2006.

The Firm’s common stock dividend policy
reflects JPMorgan Chase’s earnings outlook, desired
dividend payout ratios, need to maintain an
adequate capital level and alternative investment
opportunities. The Firm’s ability
to pay dividends is subject to restrictions. For
information regarding such restrictions, see page
72 and Note 24 and Note 29 on pages 193–194 and
199, respectively, of this Annual Report and for additional
information regarding the reduction of the dividend, see page 32.

The following table shows the common dividend
payout ratio based upon reported net income.

The Firm issued $6.0 billion and $1.8 billion
of noncumulative perpetual preferred stock on April23, 2008, and August 21, 2008, respectively.
Pursuant to the Capital Purchase Program, on
October 28, 2008, the Firm issued to the U.S.
Treasury $25.0 billion of cumulative preferred
stock and a warrant to purchase up to 88,401,697
shares of the Firm’s common stock. For additional
information regarding preferred stock, see Note 24
on pages 193–194 of this Annual Report.

On September 30, 2008, the Firm issued $11.5
billion, or 284 million shares, of common stock at
$40.50 per share. For additional information
regarding common stock, see Note 25 on pages
194–195 of this Annual Report.

Stock repurchases

During the year ended December 31, 2008, the
Firm did not repurchase any shares of its common
stock. During 2007, under the respective stock
repurchase programs then in effect, the Firm
repurchased 168 million shares for $8.2 billion at
an average price per share of $48.60.

The Board of Directors approved in April 2007, a
stock
repurchase program that authorizes the repurchase
of up to $10.0 billion of the Firm’s common shares,
which superseded an $8.0 billion stock repurchase
program approved in 2006. The $10.0 billion
authorization includes shares to be repurchased to
offset issuances under the Firm’s employee
stock-based plans. The actual number of shares that
may be repurchased is subject to various factors,
including market conditions; legal considerations
affecting the amount and timing of repurchase
activity; the Firm’s capital position (taking into
account goodwill and intangibles); internal capital
generation; and alternative potential investment
opportunities. The repurchase program does not
include specific price targets or timetables; may
be executed through open market purchases or
privately negotiated transactions, or utilizing
Rule 10b5-1 programs; and may be suspended at any
time. A Rule 10b5-1 repurchase plan allows the Firm
to repurchase shares during periods when it would
not otherwise be repurchasing common stock – for
example, during internal trading “black-out
periods.” All purchases under a Rule 10b5-1 plan
must be made according to a predefined plan that is
established when the Firm is not aware of material
nonpublic information.

As of December 31, 2008, $6.2 billion of
authorized repurchase capacity remained under
the current stock repurchase program.

For a discussion of restrictions on stock
repurchases, see Capital Purchase Program on page
72 and Note 24 on pages 193–194 of this Annual
Report.

For additional information regarding repurchases of
the Firm’s equity securities, see Part II, Item 5,
Market for registrant’s common equity, related
stockholder matters and issuer purchases of equity
securities, on page 17 of JPMorgan Chase’s 2008
Form 10-K.

Risk is an inherent part of JPMorgan Chase’s
business activities. The Firm’s risk management
framework and governance structure are intended to
provide comprehensive controls and ongoing
management of the major risks inherent in its
business activities. The Firm’s ability to properly
identify, measure, monitor and report risk is
critical to both its soundness and profitability.

•

Risk identification: The Firm’s exposure to risk through its daily business
dealings, including lending, trading and capital markets activities, is identified and
aggregated through the Firm’s risk management infrastructure. In addition, individuals who
manage risk positions, particularly those positions that are complex, are responsible for
identifying and estimating potential losses that could arise from specific or unusual
events, that may not be captured in other models, and those risks are communicated to
senior management.

•

Risk measurement: The Firm measures risk using a variety of methodologies, including
calculating probable loss, unexpected loss and value-at-risk, and by conducting stress
tests and making comparisons to external benchmarks. Measurement models and related
assumptions are routinely reviewed with the goal of ensuring that the Firm’s risk
estimates are reasonable and reflect underlying positions.

•

Risk monitoring/control: The Firm’s risk management policies and procedures
incorporate risk mitigation strategies and include approval limits by customer, product,
industry, country and business. These limits are monitored on a daily, weekly and monthly
basis, as appropriate.

•

Risk reporting: Risk reporting is executed on a line of business and consolidated
basis. This information is reported to management on a daily, weekly and monthly basis, as
appropriate. There are eight major risk types identified in the business activities of the
Firm: liquidity risk, credit risk, market risk, interest rate risk, private equity risk,
operational risk, legal and fiduciary risk, and reputation risk.

Risk governance
The Firm’s risk governance structure starts with
each line of business being responsible for
managing its own risks. Each line of business works
closely with Risk Management through its own risk
committee and, in most cases, its own chief risk
officer to manage risk. Each line of business risk
committee is responsible for decisions regarding
the business’ risk strategy, policies and controls.

Overlaying the line of business risk management are
four corporate functions with risk
management–related responsibilities: Treasury, the
Chief Investment Office, Legal and Compliance and
Risk Management.

Risk Management is headed by the Firm’s Chief Risk
Officer, who is a member of the Firm’s Operating
Committee and who reports to the Chief Executive
Officer and the Board of Directors, primarily
through the Board’s Risk Policy Committee. Risk
Management is responsible for providing a firmwide
function of risk management and controls. Within
Risk Management are units responsible for credit
risk, market risk, operational risk and private
equity risk, as well as Risk Management Services
and Risk Technology and Operations. Risk Management
Services is responsible for risk policy and
methodology, risk reporting and risk education; and
Risk Technology and Operations is responsible for
building
the information technology infrastructure used to
monitor and manage risk.

Treasury and the Chief Investment Office are
responsible for measuring, monitoring, reporting
and managing the Firm’s liquidity, interest rate
and foreign exchange risk.

Legal and Compliance has oversight for legal and fiduciary risk.

In addition to the risk committees of the lines of
business and the above-referenced corporate
functions, the Firm also has an Investment
Committee, ALCO and two other risk-related
committees, namely, the Risk Working Group and the
Markets Committee. The members of these committees
are composed of senior management of the Firm,
including representatives of line of business, Risk
Management, Finance and other senior executives.
Members of these risk committees meet frequently to
discuss a broad range of topics including, for
example, current market conditions and other
external events, current risk exposures and
concentrations to ensure that the impact of current
risk factors are considered broadly across the
Firm’s businesses.

The Investment Committee oversees global
merger and acquisition activities undertaken by
JPMorgan Chase for its own account that fall
outside the scope of the Firm’s private equity and
other principal finance activities.

The Asset-Liability Committee is responsible for
approving the Firm’s liquidity policy, including
contingency funding planning and exposure to SPEs
(and any required liquidity support by the Firm of
such SPEs). The Asset-Liability Committee also
oversees the Firm’s capital management and funds
transfer pricing policy (through which lines of
business “transfer” interest and foreign exchange
risk to Treasury in the Corporate/Private Equity
segment).

The Risk Working Group meets monthly to review
issues such as risk policy, risk methodology, Basel
II and regulatory issues and topics referred to it
by any line of business risk committee. The Markets
Committee, chaired by the Chief Risk Officer,
meets at least weekly to review and determine appropriate
courses of action with respect to significant risk
matters, including but not limited to: limits;
credit, market and operational risk; large, high
risk transactions; and hedging strategies.

The Board of Directors exercises its oversight of
risk management, principally through the Board’s
Risk Policy Committee and Audit Committee. The Risk
Policy Committee oversees senior management
risk-related responsibilities, including reviewing
management policies and performance against these
policies and related benchmarks. The Audit
Committee is responsible for oversight of
guidelines and policies that govern the process by
which risk assessment and management is undertaken.
In addition, the Audit Committee reviews
with management the system of internal controls and
financial reporting that is relied upon to provide
reasonable assurance of compliance with the Firm’s
operational risk management processes.

The ability to maintain a sufficient level
of liquidity is crucial to financial services
companies, particularly maintaining appropriate
levels of liquidity during periods of adverse
conditions. The Firm’s funding strategy is to
ensure liquidity and diversity of funding sources
to meet actual and contingent liabilities through
both stable and adverse conditions.

Recent events
During the second half of 2008, global markets
exhibited extraordinary levels of volatility and
increasing signs of stress. Throughout this period,
access by market participants to the debt, equity,
and consumer loan securitization markets was
constrained and funding spreads widened sharply. In
response to strains in financial markets, U.S.
government and regulatory agencies introduced
various programs to inject liquidity into the
financial system. JPMorgan Chase participated in a
number of these programs, two of which were the
Capital Purchase Program and the FDIC’s TLG
Program. On October 28, 2008, JPMorgan Chase issued
$25.0 billion of preferred stock as well as a
warrant to purchase up to 88,401,697 shares of the
Firm’s common stock to the U.S. Treasury under the
Capital Purchase Program, which enhanced the Firm’s
capital and liquidity positions. In addition, on
December 4, 2008, JPMorgan Chase elected to
continue to participate in the FDIC’s TLG Program,
which facilitated long-term debt issuances at rates
(including the guarantee fee charged by the FDIC)
more favorable than those for non-FDIC guaranteed
debt issuances. Under the TLG Program, the FDIC
guarantees certain senior unsecured debt of
JPMorgan Chase, and in return for the guarantees,
the FDIC is paid a fee based on the amount and
maturity of the debt. Under the TLG Program, the
FDIC will pay the unpaid principal and interest on
an FDIC-guaranteed debt instrument upon the uncured
failure of the participating entity to make a
timely payment of principal or interest in
accordance with the terms of the instrument. During
the fourth quarter of 2008, pursuant to the TLG
Program, the Firm issued $20.8 billion of bonds
guaranteed by the FDIC, further enhancing the
Firm’s liquidity position. At December 31, 2008,
all of the FDIC-guaranteed debt
was outstanding and had a carrying value of $21.0
billion, net of hedges. In the interest of
promoting deposit stability, during the fourth
quarter, the FDIC also (i) temporarily increased,
through 2009, insurance coverage on bank deposits
to $250,000 per customer from $100,000 per
customer, and (ii) for qualified institutions who
participated in the TLG Program (such as the Firm),
provided full deposit insurance coverage for noninterest-bearing transaction accounts.

During the second half of 2008, the Firm’s
deposits (excluding those assumed in connection
with the Washington Mutual transaction) increased
substantially, as the Firm benefited from the
heightened volatility and credit concerns
affecting the markets.

On May 30, 2008, JPMorgan Chase completed the
merger with Bear Stearns. Due to the structure of
the transaction and the de-risking of positions
over time, the merger with Bear Stearns had no
material impact on the Firm’s liquidity. On
September 25, 2008, JPMorgan Chase acquired the
banking operations of Washington Mutual from the
FDIC. As part of the Washington Mutual transaction,
JPMorgan Chase assumed Washington Mutual’s deposits
as well as its obligations to its credit card
securitization-related master trusts, covered
bonds, and liabilities to certain Federal Home Loan
Banks. The Washington Mutual transaction had an
insignificant impact on the Firm’s overall
liquidity position.

Both S&P and Moody’s lowered the Firm’s ratings one
notch on December 19, 2008 and January 15, 2009,
respectively. These rating actions did not have a
material impact on the cost or availability of
funding to the Firm. For a further discussion of
credit ratings, see the Credit Ratings caption of
this Liquidity Risk Management section on pages 79-80 of
this Annual Report.

Notwithstanding the market events during the latter
half of 2008, the Firm’s liquidity position
remained strong based on its liquidity metrics as
of December 31, 2008. The Firm believes that its
unsecured and secured funding capacity is
sufficient to meet on- and off-balance sheet
obligations. JPMorgan Chase’s long-dated funding,
including core liabilities, exceeded illiquid
assets. In addition, during the course of 2008, the
Firm raised funds at the parent holding company in
excess of its minimum threshold to cover its
obligations and those of its nonbank subsidiaries
that mature over the next 12 months.

Governance
The Asset-Liability Committee approves and oversees
the execution of the Firm’s liquidity policy and
contingency funding plan. Corporate Treasury
formulates the Firm’s liquidity and contingency
planning strategies and is responsible for
measuring, monitoring, reporting and managing the
Firm’s liquidity risk profile.

Liquidity monitoring
The Firm monitors liquidity trends, tracks
historical and prospective on- and off-balance
sheet liquidity obligations, identifies and
measures internal and external liquidity warning
signals to permit early detection of liquidity
issues, and manages contingency planning
(including identification and testing of various
company-specific and market-driven stress
scenarios). Various tools, which together
contribute to an overall firmwide liquidity
perspective, are used to monitor and manage
liquidity. Among others, these include: (i)
analysis of the timing of liquidity sources versus
liquidity uses (i.e., funding gaps) over periods
ranging from overnight to one year; (ii) management
of debt and capital issuances to ensure that the
illiquid portion of the balance sheet can be funded
by equity, long-term debt, trust preferred capital
debt securities and deposits the Firm believes to
be stable; and (iii) assessment of the Firm’s
capacity to raise incremental unsecured and secured
funding.

Liquidity of the parent holding company and its
nonbank subsidiaries is monitored independently as
well as in conjunction with the liquidity

of the Firm’s bank subsidiaries. At the parent
holding company level, long-term funding is managed
to ensure that the parent holding company has, at a
minimum, sufficient liquidity to cover its
obligations and those of its nonbank subsidiaries
within the next 12 months. For bank subsidiaries,
the focus of liquidity risk management is on
maintenance of unsecured and secured funding
capacity sufficient to meet on- and off-balance
sheet obligations.

A component of liquidity management is the Firm’s
contingency funding plan. The goal of the plan is
to ensure appropriate liquidity during normal and
stress periods. The plan considers various
temporary and long-term stress scenarios where
access to unsecured funding is severely limited or
nonexistent, taking into account both on-and
off-balance sheet exposures, and separately
evaluates access to funds by the parent holding
company and the Firm’s banks.

Funding

Sources of funds
The deposits held by the RFS, CB, TSS and AM lines
of business are a generally consistent source of
funding for JPMorgan Chase Bank, N.A. As of
December 31, 2008, total deposits for the Firm were
$1.0 trillion, compared with $740.7 billion at
December 31, 2007. A significant portion of the
Firm’s deposits are retail deposits, which are less
sensitive to interest rate changes or market
volatility and therefore are considered more stable
than market-based (i.e., wholesale) liability
balances. The Washington Mutual transaction added
approximately $159.9 billion of deposits to the
Firm, a significant majority of which are retail
deposits. In addition, through the normal course of
business, the Firm benefits from substantial
liability balances originated by RFS, CB, TSS and AM.
These franchise-generated liability balances
include deposits and funds that are swept to
on-balance sheet liabilities (e.g., commercial
paper, federal funds purchased and securities
loaned or sold under repurchase agreements), a
significant portion of which are considered to be
stable and consistent sources of funding due to the
nature of the businesses from which
they are generated. For further discussions of
deposit and liability balance trends, see the
discussion of the results for the Firm’s business
segments and the Balance sheet analysis on pages
42–60 and 64–66, respectively, of this Annual
Report.

Additional sources of funding include a variety of
unsecured short-and long-term instruments,
including federal funds purchased, certificates of
deposits, time deposits, bank notes, commercial
paper, long-term debt, trust preferred capital debt
securities, preferred stock and common stock.
Secured sources of funding include securities
loaned or sold under repurchase agreements, asset
securitizations, borrowings from the Federal
Reserve (including discount window borrowings, the
Primary Dealer Credit Facility and the Term Auction
Facility) and borrowings from the Chicago,
Pittsburgh and, as a result of the Washington
Mutual transaction, the San Francisco Federal Home
Loan Banks. However, the Firm does not view
borrowings from the Federal Reserve as a primary
means of funding the Firm.

Issuance
Funding markets are evaluated on an ongoing basis
to achieve an appropriate global balance of
unsecured and secured funding at favorable rates.
Generating funding from a broad range of sources in
a variety of geographic locations enhances
financial flexibility and limits dependence on any
one source.

During 2008, JPMorgan Chase issued approximately
$42.6 billion of long-term debt for funding or
capital management purposes, including $20.8
billion of FDIC-guaranteed notes issued under the
TLG Program. The Firm also issued $28.0 billion of
IB structured notes, the issuances of which are
generally client-driven and not for funding or
capital management purposes, as the proceeds from
such transactions are generally used to purchase
securities to mitigate the risk associated with
structured note exposure. In addition, during the
year, the Firm issued $1.8 billion of trust
preferred capital debt securities. During the same
period, the Firm redeemed or had maturities of
$62.7 billion of securities, including $35.8
billion of IB structured notes.

Preferred stock issuances included $6.0 billion and
$1.8 billion of noncumulative perpetual preferred
stock issued on April 23 and August 21, 2008,
respectively, as well as preferred stock issued to
the U.S. Treasury on October 28, 2008, under the
Capital Purchase Program. In connection with
preferred stock issuance under the Capital Purchase
Program, the Firm also issued to the U.S. Treasury
on October 28, 2008, a warrant to purchase up to
88,401,697 shares of the Firm’s common stock, at an
exercise price of $42.42 per share, subject to
certain antidilution and other adjustments. The
Firm has in the past, and may continue in the
future, to repurchase from time to time its debt or
trust preferred capital debt securities in open
market purchases or privately negotiated
transactions subject to regulatory and contractual
restrictions.

Finally, during 2008, the Firm securitized $21.4
billion of credit card loans. The ability to
securitize loans, and the associated gains on those
securitizations, are principally
dependent upon the credit quality and other
characteristics of the assets securitized as well
as upon prevailing market conditions. Given the
volatility and stress in the financial markets in
the second half of 2008, the Firm did not
securitize any residential mortgage loans, auto
loans or student loans during 2008.

Replacement Capital Covenants
In connection with the issuance of certain of its
trust preferred capital debt securities and
noncumulative perpetual preferred stock, the Firm
entered into Replacement Capital Covenants (“RCCs”)
granting certain rights to the holders of “covered
debt,” as defined in the RCCs, that prohibit the
repayment, redemption or purchase of the trust
preferred capital debt securities and noncumulative
perpetual preferred stock except, with limited
exceptions, to the extent that JPMorgan Chase has
received, in each such case, specified amounts of
proceeds from the sale of certain qualifying
securities. Currently the Firm’s covered debt is
its 5.875% Junior Subordinated Deferrable Interest
Debentures, Series O, due in 2035. For more
information regarding these covenants, reference is
made to the respective RCCs entered into by the
Firm in connection with the issuances of such trust
preferred capital debt securities and noncumulative
perpetual

preferred stock, which are filed with the U.S.
Securities and Exchange Commission under cover of
Forms 8-K.

Cash flows
For the years ended December 31, 2008, 2007 and
2006, cash and due from banks decreased $13.2
billion, $268 million, and increased
$3.7 billion, respectively. The following
discussion highlights the major activities and
transactions that affected JPMorgan Chase’s cash
flows during 2008, 2007 and 2006.

Cash Flows from Operating Activities
JPMorgan Chase’s operating assets and liabilities
support the Firm’s capital markets and lending
activities, including the origination or purchase
of loans initially designated as held-for-sale.
The operating assets and liabilities can vary
significantly in the normal course of business due
to the amount and timing of cash flows, which are
affected by client-driven activities, market
conditions and trading strategies. Management
believes cash flows from operations, available
cash balances and the Firm’s ability to generate
cash through short-and long-term borrowings are
sufficient to fund the Firm’s operating liquidity
needs.

For the year ended December 31, 2008, net cash
provided by operating activities was $23.1 billion,
while for the years ended December 31, 2007 and
2006, net cash used in operating activities was
$110.6 billion and $49.6 billion, respectively. In
2008, net cash generated from operating activities
was higher than net income,
largely as a result of adjustments for operating
items such as the provision for credit losses,
depreciation and amortization, stock-based
compensation, and certain other expense. During
2006, 2007 and 2008,
cash was used to fund loans held-for-sale,
primarily in IB and RFS. During 2008, proceeds
from sales of loans originated or purchased with an
initial intent to sell were slightly higher than
cash used to acquire such loans; but the cash flows
from these activities were at a significantly lower
level than for the same periods in 2007 and 2006 as
a result of current market conditions. In 2007 and
2006, cash used to acquire such loans was slightly
higher than proceeds from sales.

For the years ended December 31, 2007 and 2006, the
net cash used in operating activities supported
growth in the Firm’s lending and capital markets
activities. In 2007, when compared with 2006, there
was a significant decline in cash flows from IB
loan originations/purchases and sale/securitization
activities as a result of the difficult wholesale
securitization market and capital markets for
leveraged financings, which were affected by a
significant deterioration in liquidity in the
second half of 2007. Cash flows in 2007 associated
with RFS residential mortgage activities grew,
reflecting an increase in originations.

Cash Flows from Investing Activities
The Firm’s investing activities predominantly
include originating loans to be held for investment,
other receivables, the available-for-sale
investment portfolio and other short-term
investment vehicles. For the year ended December31, 2008, net cash of $286.3 billion was used in
investing activities, primarily for: purchases of
investment securities in Corporate’s AFS portfolio
to manage the Firm’s exposure to interest

rate movements, as well as to make strategic
longer-term investments; increased deposits with
banks as the result of the availability of excess
cash for short-term investment opportunities
through inter-bank lending, and from deposits with
the Federal Reserve (which is now an investing
activity, reflecting a policy change of the Federal
Reserve to pay interest to depository institutions
on reserve balances); net additions to the
wholesale loan portfolio, from organic growth in
CB; additions to the consumer prime mortgage
portfolio as a result of the decision to retain,
rather than sell, new originations of nonconforming
prime mortgage loans; an increase in securities
purchased under resale agreements reflecting growth
in demand from clients for liquidity; and net
purchases of asset-backed commercial paper from
money market mutual funds in connection with a
temporary Federal Reserve Bank of Boston lending
facility. Partially offsetting these uses of cash
were proceeds from sales and maturities of AFS
securities; loan sales and credit card
securitization activities, which were at a lower
level than for the same periods in 2007 as a result
of the adverse market conditions that have
continued since the last half of 2007; and net cash
received from acquisitions and the sale of an
investment. Additionally, in June 2008, in
connection with the merger
with Bear Stearns, the Firm sold assets acquired
from Bear Stearns to the FRBNY and received cash
proceeds of $28.85 billion (for additional
information see Note 2 on page 123–128 of this
Annual Report).

For the year ended December 31, 2007, net cash of
$73.1 billion was used in investing activities,
primarily to fund purchases in the AFS securities
portfolio to manage the Firm’s exposure to interest
rate movements; net additions to the wholesale
retained loan portfolios in IB, CB and AM, mainly
as a result of business growth; a net increase in
the consumer retained loan portfolio, primarily
reflecting growth in RFS in home equity loans and
net additions to RFS’ subprime mortgage loans
portfolio (which was affected by management’s
decision in the third quarter to retain (rather
than sell) new subprime mortgages), and growth in
prime mortgage loans originated by RFS and AM that
cannot be sold to U.S. government agencies or U.S.
government-sponsored enterprises; and increases in
securities purchased under resale agreements as a
result of a higher level of cash that was available
for short-term investment opportunities in
connection with the Firm’s efforts to build
liquidity. These net uses of cash were partially
offset by cash proceeds received from sales and
maturities of AFS securities; and credit card,
residential mortgage, student and wholesale loan
sales and securitization activities, which grew in
2007 despite the difficult conditions in the credit
markets.

For the year ended December 31, 2006, net cash of
$99.6 billion was used in investing activities. Net
cash was invested to fund net additions to the
retained wholesale loan portfolio, mainly resulting
from capital markets activity in IB leveraged
financings; increases in CS loans reflecting strong
organic growth; net additions in retail home equity
loans; the acquisition of private-label credit card
portfolios from Kohl’s, BP and Pier 1 Imports,
Inc.; the acquisition of Collegiate Funding
Services; and purchases of AFS securities in
connection with repositioning the portfolio in
response to changes in interest rates. These uses
of cash were partially offset by cash proceeds
provided from credit card, residential mortgage,
auto and

wholesale loan sales and securitization
activities; sales and maturities of AFS
securities; the net decline in auto loans, which
was caused partially by management’s decision to
de-emphasize vehicle leasing; and the sale of the
insurance business at the beginning of the second
quarter.

Cash Flows from Financing Activities
The Firm’s financing activities primarily reflect
cash flows related to customer deposits, issuances
of long-term debt and trust preferred capital debt
securities, and issuances of preferred and common
stock. In 2008, net cash provided by financing
activities was $250.5 billion due to: growth in
wholesale deposits, in particular, interest-and
noninterest-bearing deposits in TSS (driven by both
new and existing clients, and due to the deposit
inflows related to the heightened volatility and
credit
concerns affecting the global markets), as well as
increases in AM and CB (due to organic growth);
proceeds of
$25.0 billion from the issuance of preferred stock
and a warrant to the U.S. Treasury under the
Capital Purchase Program; additional issuances of
common stock and preferred stock used for general
corporate purposes; an increase in other borrowings
due to nonrecourse secured advances from the
Federal Reserve Bank of Boston to fund the purchase
of asset-backed commercial paper from money market
mutual funds; increases in federal funds purchased
and securities loaned or sold under repurchase
agreements in connection with higher short-term
requirements to fulfill client demand for liquidity
and finance the Firm’s AFS securities inventory;
and a net increase in long-term debt due to a
combination of non-FDIC guaranteed debt and trust
preferred capital debt securities issued prior to
December4, 2008, and the issuance of $20.8 billion of
FDIC-guaranteed long-term debt issued during the
fourth quarter of 2008. The fourth-quarter
FDIC-guaranteed issuance was offset partially by
maturities of non-FDIC guaranteed long-term debt
during the same period. The increase in long-term
debt and trust preferred capital debt securities
was used primarily to fund certain illiquid assets
held by the parent holding company and build
liquidity. Cash was also used to pay dividends on
common and preferred stock. The Firm did not
repurchase any shares of its common stock in the
open market during 2008 in order to maintain its
capital objectives.

In 2007, net cash provided by financing activities
was $183.0 billion due to a net increase in
wholesale deposits from growth in business volumes,
in particular, interest-bearing deposits at TSS, AM
and CB;

net issuances of long-term debt and trust preferred
capital debt securities primarily to fund certain
illiquid assets held by the parent holding company
and build liquidity, and by IB from client-driven
structured notes transactions; and growth in
commercial paper issuances and other borrowed funds
due to growth in the volume of liability balances
in sweep accounts in TSS and CB, and to fund
trading positions and to further build liquidity.
Cash was used to repurchase common stock and pay
dividends on common stock, including an increase in
the quarterly dividend in the second quarter of
2007.

In 2006, net cash provided by financing activities
was $152.7 billion due to net cash received from
growth in deposits, reflecting new retail account
acquisitions and the ongoing expansion of the
retail branch distribution network; higher
wholesale business volumes; increases in securities
sold under repurchase agreements to fund trading
positions and higher AFS securities positions; and
net issuances of long-term debt and trust preferred
capital debt securities. The net cash provided was
offset partially by the payment of cash dividends
on stock and common stock repurchases.

Credit ratings
The cost and availability of financing are
influenced by credit ratings. Reductions in these
ratings could have an adverse effect on the Firm’s
access to liquidity sources, increase the cost of
funds, trigger additional collateral or funding
requirements and decrease the number of investors
and counterparties willing to lend to the Firm.
Additionally, the Firm’s funding requirements for
VIEs and other third-party commitments may be
adversely affected. For additional information on
the impact of a credit ratings downgrade on the
funding requirements for VIEs, and on derivatives
and collateral agreements, see Special-purpose
entities on pages 67–68 and Ratings profile of
derivative receivables marked to market (“MTM”) on
page 88 of this Annual Report.

On December 19, 2008, S&P lowered the senior
long-term debt ratings on JPMorgan Chase & Co. and
its principal bank subsidiaries one notch from
“AA-” and “AA”, respectively; lowered the
short-term debt rating of JPMorgan Chase & Co. from
“A-1+”; and affirmed the short-term debt ratings of
its principal bank subsidiaries. These actions were
primarily the result of S&P’s belief that the
Firm’s earnings are likely to decline over the next
couple of years in response to increasing loan
losses associated with the Firm’s exposure to
consumer lending, as well as declining business
volumes. S&P’s current outlook is negative. On
January 15, 2009, Moody’s lowered the senior
long-term debt ratings on JPMorgan Chase & Co. and
its principal bank subsidiaries from “Aa2” and
“Aaa”, respectively. These actions were primarily
the result of Moody’s view that, in the current
economic environment, the Firm may experience
difficulties generating capital and could face
significant earnings pressure. Moody’s affirmed the
short-term debt ratings of JPMorgan Chase &

Co. and its principal bank subsidiaries at “P-1”.
Moody’s also revised the outlook to stable from
negative due to the Firm’s strong capital ratios,
significant loan loss reserves, and strong
franchise. Ratings from Fitch on JPMorgan Chase &
Co. and its principal bank subsidiaries remained
unchanged from December 31, 2007, and Fitch’s
outlook remained stable. The recent rating actions
by S&P and Moody’s did not have a material impact
on the cost or availability of the Firm’s funding. If the
Firm’s senior long-term debt ratings were
downgraded by one additional notch, the Firm
believes the incremental cost of funds or loss of funding would be
manageable within the context of current market conditions and the
Firm’s liquidity resources. JPMorgan Chase’s unsecured
debt, other than in certain cases the IB structured notes, does not contain requirements that would call
for an acceleration of payments, maturities or
changes in the structure of the existing debt, nor
contain collateral provisions or the creation of an
additional financial obligation, based on
unfavorable changes in the Firm’s credit ratings,
financial ratios, earnings, cash flows or stock
price. To the extent any IB structured notes do contain such
provisions, the Firm believes that, in the event of an acceleration
of payments or maturities or provision of collateral, the securities
used by the Firm to risk manage such structured notes, together with
other liquidity resources, are expected to generate funds sufficient
to satisfy the Firm’s obligations.

CREDIT RISK MANAGEMENT

Credit risk is the risk of loss from obligor or
counterparty default. The Firm provides credit (for
example, through loans, lending-related commitments
and derivatives) to a variety of customers, from
large corporate and institutional clients to the
individual consumer. For the wholesale business,
credit risk management includes the distribution of
syndicated loans originated by the Firm into the
marketplace (primarily to IB clients), with
exposure held in the retained portfolio averaging
less than 10% of the total originated loans.
Wholesale loans generated by CB and AM are
generally retained on the balance sheet. With
regard to the consumer credit market, the Firm
focuses on creating a portfolio that is diversified
from both a product and a geographic perspective.
Loss mitigation strategies are being employed for all
home lending portfolios. These strategies include
rate reductions, principal forgiveness, forbearance
and other actions intended to minimize the economic
loss and avoid foreclosure. In the mortgage
business, originated loans are either retained in
the mortgage portfolio or securitized and sold to
U.S. government agencies and U.S. government-sponsored enterprises.

Credit risk organization
Credit risk management is overseen by the Chief
Risk Officer and implemented within the lines of
business. The Firm’s credit risk management
governance consists of the following functions:

•

establishing a comprehensive credit risk policy framework

•

monitoring and managing credit risk across all portfolio segments, including
transaction and line approval

•

assigning and managing credit authorities in connection with the approval of all
credit exposure

Risk identification
The Firm is exposed to credit risk through lending
and capital markets activities. The credit risk
management organization works in partnership with the
business segments in identifying and aggregating
exposures across all lines of business.

Risk measurement
To measure credit risk, the Firm employs several
methodologies for estimating the likelihood of
obligor or counterparty default. Methodologies for
measuring credit risk vary depending on several
factors, including type of asset (e.g., consumer
installment versus wholesale loan), risk
measurement parameters (e.g., delinquency status
and credit bureau score versus wholesale risk
rating) and risk management and collection
processes (e.g., retail collection center versus
centrally managed workout groups). Credit risk
measurement is based upon the amount of exposure
should the obligor or the counterparty default, the
probability of default and the loss severity given
a default event. Based upon these factors and
related market-based inputs, the Firm estimates
both probable and unexpected losses for the
wholesale and consumer portfolios. Probable losses,
reflected in the provision for credit losses, are
based primarily upon statistical estimates of
credit losses as a result of obligor or
counterparty default. However, probable losses are
not the sole indicators of risk. If losses were
entirely predictable, the probable loss rate could
be factored into pricing and covered as a normal
and recurring cost of doing business. Unexpected
losses, reflected in the allocation of credit risk
ca